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Financing Options for Start Ups and Emerging Businesses
It’s interesting to see what motivates business owners to come and seek legal assistance for the first time. Often, it’s due to unexpected litigation that a business has to defend. If not, it’s likely that most small business owners will seek out legal counsel as they strive to increase their financing options, one way or another.
For many start ups, particularly Information technology and health care related companies, there is hope that an equity investment will come from an independent, third party, even before a track record of revenue growth and profitability is established. Realistically, businesses at this stage often have a better hope of obtaining a rare equity investment, than they are to be capable of qualifying for a line of credit or other debt financing.
Businesses typically start with an investment from: (1) the owner’s personal resources, like home equity, a 401(k), or other assets, (2) investment from a silent partner who is persuaded to make an investment from a few thousand to perhaps $100,000 to help get the business off the ground, or (3) “bootstrapping” the business with a few personal dollars here and there, then earning its way forward by producing increasing amounts of revenue over time.
It isn’t long, however, before most businesses appetites for growth exceed the amount of working capital on hand. As its principles go out and learn that their businesses’ history is too short, their asset base too small, and their profitability too much in doubt for traditional financing to be easily procured, they seek out alternative sources of financing, and help structuring their business to present itself as more creditworthy. At this point, a conversation with an attorney can become very interesting.
The Buy-Sell Agreement recommended by the bank needs to be drafted; you may need an operating agreement, reliable protection for your intellectual property; other boundaries for “hard assets” that may be used for collateral in a financing arrangement; and many other tools might be considered as well.
Sometimes, another advisor, perhaps a tax accountant, auditor, business valuation expert, etc., might be able to provide more immediate and relevant information, but you will soon need an attorney involved to provide the appropriate documentation for the steps you will take.
But the questions my clients ask typically aren’t about the documents themselves, they are usually questions about where to go and what kinds of financing they should seek.
This is the first in a series of articles devoted to various financing options for emerging businesses. In the future, this column will examine various equity financing arrangements and borrowing options. Below is a brief outline of several debt financing options in the early growth stages of business.
Traditional, Unsecured Lines of Credit: obtaining a traditional line of credit is highly dependent on past credit, cash flow and bank relationships. It’s often difficult to obtain until after other sources have been used successfully.
Factoring: most short term assets, receivables, inventory, etc., as well as month over month cash flows, can be factored to obtain short term financing. The cost of factoring can be very expensive compared with traditional financing, but for many newer businesses, it’s the most efficient way to get to the capital resources needed to grow your business.
SBA Lending: loan guaranties are available with appropriate loan covenants and through approved lenders from the US Small Business Administration. Qualifying is marginally easier than it is for traditional financing, but it’s by no means automatic.
Micro-enterprise Loan Programs: Here in Hamilton County, thanks to the joint efforts of the Entrepreneurial Advancement Center (“EAC”), and the Convention and Visitors Bureau, the USDA has provided grant support for loans to new businesses in defined rural areas, by making application though the SELF (Small Enterprise Loan Fund) program administered by the EAC.
There are many different ways a business can obtain funding to meet its needs. From friends and family options, and independent, private means, to various forms of government backing for lending projects. Considering what’s “best” for your business is an important first step, but you are likely to have to go beyond what’s best to consider what’s actually possible.
Early on, if your business is to survive, you have to do what it takes to make it work. The good news is you are surrounded, in this community, by ample resources, and professionals, ready to help you and your business take the next step on the road to success. Call on those resources sooner rather than later and give yourself the best chance to succeed.
The Super Bowl, Room Reservations and Contract Claims
Here in Indianapolis, there is as much excitement that our city will host this year’s Super Bowl as there is disappointment that the Colts are not likely to be playing. The excitement building around the coming of the Super Bowl is accompanied by a rush of energy toward finding tickets, suitable lodging and transportation for those who will make their way into town to witness the spectacle.
If you’re an out-of town vendor, you have to deal with the city’s maze (though not as bad as some previous venues I’m told) of licensing and regulatory hurdles. If you’re a guest, hoping or possessing tickets to the prized affair, you did well to book your room and other necessary plans at least a year in advance of your arrival. If you’re a hotel owner, restaurant or local broker of travel needs – you’re in a fortunate spot on one hand, but faced with some unusual and frightening challenges on the other.
Take the following example: a group that faithfully books space for Super Bowl events realizes over the preceding summer that the NFL season, and the big event were both very much in jeopardy. The demand for their rooms, catering, transportation, etc., wanes considerably and they decide to cancel some, but not all, of their reservations according to the terms of the contract with a local hotel. Shortly after the cancellation, they learn that the season is being played after all, demand accelerates, and they try to reinstate their order.
Too late! According to the hotel’s reservation staff, these rooms got snapped up almost immediately after the announcement that the game would be played. In fact, they had had serious inquiries even before the announcement.
Btu there’s a catch – the cancellation policy required a sign off by the hotel, and that signature was never placed on the document. Now the group’s agent insists the rooms are theirs, but to be sure they don’t lose the rooms, they book elsewhere, at a cost of more than five times the original price, and for similar lodging. They then file suit seeking damages for the difference in cost. The hotel responds claiming the alternate reservations do not fairly or accurately reflect any losses, if any, suffered by the travel group.
Unfortunately, variations on this scenario play out far too often when an event of the magnitude of the Super Bowl comes down. If you’re on either side of the transaction, you need and deserve effective counsel to help you weave through this thorny situation, just as you do, if you are a vendor seeking licensing, or a ticket broker buying and selling seat licenses at Lucas Oil Field for the magical day. Even if you’re a local homeowner, or an out of town visitor renting a spot for the game, you may need a competent attorney to advise you of your rights.
The Thompson Law Office handles interesting and challenging cases like these regularly, particularly for out-of-state parties needing local counsel, and local residents and business owners with contracts that involve Super Bowl transactions. If you would like a free consultation, call our offices today at (317) 564-4976.
