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Phoenix, AZ 85004
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Finance Options for Your Business
Whether creating, restructuring, or expanding your business, there are several options to finance your business. Among these are four major sources: (1) direct financing through a bank, (2) angel investors and venture capitalists, (3) privately or publicly selling stocks, bonds or investment contracts, and (4) private financing-also known as “hard money lending.” Depending on your immediate and long-term needs and goals, each source provides different advantages and disadvantages. As always, the best source of current laws and information is an attorney familiar with business and finance law, such as our attorneys at Gunderson, Denton & Peterson, PC.
Direct Financing through a Bank
Obtaining financing through a bank is often a positive option to finance your business. Banks provide short-term, mid-term and long-term financing. Typically, giving up ownership is not required, but these loans may include debt acquisition restrictions and personal guarantees of collateral to ensure repayment. Banks sometime offer flexibility of repayment and early loan termination. The difficulty lies with loan availability and the cost from interest rates charged.
Banks determine costs and availability according to risk. Higher risks require higher interest rates, more restrictions, and more personal guarantees through collateral. Risks are weighed by considering the owner(s) personal and business credit, track record, history and relationship with the bank, assets to back the loan as collateral, education and experience, type of business, and likelihood of success.
In conjunction with conventional financing sources, you should also consider local and state economic development organizations for subsidized loans and grants. Although these programs may not be available for everyone, if you are able to get them, they can often make the difference between a successful company and one that closes shop or goes bankrupt.
Angel Investors or Venture Capital
Other options to finance your business include angel investors and venture capitalists. Angel investors and venture capitalists are professional investors who make their money by purchasing ownership interest in a company, building the company up, and then selling it. This may mean selling the business to someone else, or it may take the form of buy-back provisions that give the owner(s) the option to purchase the ownership interest back. Although angel investors and venture capitalists generally do not have long-term ownership in mind, they may require management control and/or limit debt acquisition. This option tends to be more costly than direct loans from a bank. However, it may prove to be more available than a bank loan, and sometimes more beneficial as a result of the lender’s expertise and contacts.
Stocks, Bonds, Investment Contracts from Public and Private Entities
Another option to finance your business is through selling stocks, bonds, or investment contracts to public or private entities. Just as it sounds, you are essentially selling ownership interest in the business. Unlike direct bank loans, owner(s) pay dividends to investors rather than interest to the bank. Although there may not be provisions requiring repayment, these investment contracts may include buy-back provisions for the business owner(s). Public offerings can raise considerable amounts of money but are expensive and time consuming. Accordingly, this option is not usually available for smaller, newer businesses. It is important to know that the Securities Exchange Commission (SEC) and Arizona Corporation Commission regulate the sale of stocks, bonds, and investment contracts to public and private entities. Because the laws regarding securities are broad and complicated, it is important to consult with an experienced attorney about disclosure requirements.
Private Financing or Hard Money Lending
Another option to finance your business is through ‘hard money lending.’ Hard money loans are short-term, asset-based loans, frequently requiring real estate or other property as collateral. They are often last-result or immediate-need-based, and are therefore issued with higher interest rates. Because interest rates are high, the loans usually require guarantees using collateral in the form of real estate, personal and/or business assets. Hard money loans have traditionally been mostly unregulated by state or federal laws, and therefore leave little protection to borrowers. Although there are some regulations in some jurisdictions, due to the high interest rates and vulnerability to an owner’s property and assets, hard money borrowers should use a professional real estate attorney to review the loan documents.
When deciding where to derive financing for your business, it is important to consider your short, mid, and long-term needs and goals. Each source provides different advantages, disadvantages, and vulnerabilities. As always, it is best to consult an experienced professional. Attorneys at Gunderson, Denton, & Peterson PC can assist you with current information on financing laws and options so that you can implement the best strategies to ensure the success of your company.
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Mesa, Arizona 85213
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Phoenix, AZ 85004
GDP Business Blog
Mesa, AZ 85213