Startup Funding: Some Legal and Financial Tips

Finding the most suitable source of capital for your company may be challenging without adequate knowledge. When starting a business you must consider several funding methods to ensure you have a stable cash flow when revenues are not consistent or constant during the early days of your venture. According to studies, about 50% of new businesses fail within the first five years of being established, and in most cases financial instability is the main reason for shutting down.

This week, we will give you three startup business funding ideas to help you grow your company. We will also discuss pros and cons associated with each of these approaches.

Self-Funding

In this method the business owner uses personal funds like savings, credit cards, equity lines, retirement funds, and donations from family and friends. This solution may not raise a lot of money, but it will need little to no regulatory compliance, paperwork or business contracts. Self-funding will help you avoid expensive loans and is suitable for small businesses. However, budgeting is a very important part of this process. Bootstrapping a business idea may not provide a lot of breathing room for auxiliary spending, marketing and business development costs, or any miscellaneous expenses. Therefore, each dollar spent has to be accounted for accurately and carefully. We recommend that individuals looking to self fund their business ideas, make use of qualified accounting advice, and apply accounting rules for revenue recognition, as well as other budgeting techniques, to make sure they don’t exceed budgets or overreport success. Making a mistake with the budgeting can lead to devastating cash flow consequences. Budgeting your expenses, and predicting your earnings, up to one year in advance, is most appropriate when considering the self funded approach.

Venture Capitalists

With Venture Capitalism, the business owner can get the needed funds in exchange for selling some shares in the business venture. Since the venture capitalist investors will join your business as a shareholders, a side benefit of venture funding is that your investor may also have extensive business experience, which will be of use when making strategic decisions. In addition, surplus funds could allow you to hire experts to run each department, and boost the chances of business success. With more funding, there are larger budgets and therefore greater marketing capabilities , which can help increase chances of success as well. As financiers focus on companies with high potential, you must create an elaborate a business plan, while increasing your online visibility to potential clients.

In addition, depending on the type of fundraising activities you engage in, you may have to comply with various securities and corporate regulations. For example, in the US, many types of share offerings have to be registered with the Securities and Exchange Commission (SEC), unless they fall under an exemption. Shares will also have to be issued to investors in most cases, and paperwork/legal documents will need to be put into effect to formalize the relations between the parties. These documents include Subscription Agreements, Share Purchase Agreements, Shareholder Agreements, Corporate Bylaws, and others.

Business Loan

Loans are probably one of the best startup ideas if you need capital with complete control of your business. The benefit of using loans to support your startup costs is that they can help you build connections with banks, and a good credit history if you are reliable in your debt repayments. However, when considering this option, create a detailed business plan with a financial projection for at least the next five years to help you determine how much money you need, then present this to several banks and credit unions. If you already have an account with the bank, the bank’s financial experts may also offer lending advice and crucial startup ideas. This approach could be expensive however. Banks will generally charge interest on any loans they offer, and if the interest is compounded (interest is applied to interest), you could end up paying much more than you would to an investor, in the first few years of your operation. In essence, your company will be liable for the business loan regardless of your success. Therefore, loan default during bad times could be a recipe for business bankruptcy. It is very important to review the terms and conditions of your loan agreement with a bank or financer carefully. Some business founders may also have access to low interest government loans or grants, which are worth exploring for a budding entrepreneur.

For more information on startups and business law get in touch with us today at info@borderlesscounsel.com!