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BOSTON, MASSACHUSETTS | LOS ANGELES, CALIFORNIA | GARDEN CITY, NEW YORK*
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HMS ENDEAVOUR In 1768, explorer James Cook sailed the Endeavour on an expedition to chart the transit of the planet Venus. He returned to England in 1771, having circumnavigated the globe and charted the coasts of New Zealand and eastern Australia for the first time in history. A replica of James Cook's Endeavour is pictured above.
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FINANCING A BUSINESS VENTURE. ENDEAVORLEGAL attorneys represent clients in a wide variety of financing transactions including private placements of equity ownership interests in corporations and limited liability companies and business loan transactions. Accessing capital is among the most important aspects of starting many new business ventures and must be conducted within the complex confines of the regulatory schemes governed by Federal securities laws. NEED LEGAL HELP OBTAINING FINANCING FOR YOUR BUSINESS? FINANCING THE BUSINESS VENTURE: DEBT (CREDIT) VS. EQUITY The following is a brief description of two common ways to finance a business venture. Most fledging entrepreneurs do not have the kind of capital necessary to start a new business readily available. As such, it is common for the aspiring owner to seek outside sources of funding to purchase and open the venture. An entrepreneur is faced with two options when seeking capital to finance his vision: Debt (also know as Credit) or Equity Financing. Debt (Credit) Financing. The business borrows money from a bank, other financial institution or private lender pursuant to the terms of a promissory note, security agreement and related documents. The amount borrowed must be repaid with interest over the course of a specified period of time or in the form of a “balloon” payment at the end of the term of the loan. Debt financing can be a risky proposition for new business ventures as many lending institutions require the entrepreneur to personally guaranty the loan (which means it becomes the personal obligation of the owner rather than solely an obligation of the business). Lenders also often require the assets of the venture to be pledged as collateral for a loan. One disadvantage to debt financing is that loan payments must be made each month regardless of how well the business is doing during that particular time period. If payments are not made, the venture will be in default under the terms of the loan. Default typically results in the lender seizing and potentially selling the assets of the business (and of the entrepreneur if a personal guaranty is in effect) in order to obtain satisfaction for the outstanding amount of the loan. In addition, each monthly payment of principal and interest is a fixed cost during the life of the loan increasing the business’ monthly breakeven point. The company generates profits for its owners only after reaching the breakeven point. New businesses are typically subject to lending at higher interest rates than well-established businesses as they are viewed as a greater risk of failure and non-payment. However, lower interest rates are typically available in connection with the purchase of real estate as it possesses value separate and apart from the success or failure of the business venture. Despite the downsides to debt financing described above, an entrepreneur may need to obtain loans to open his business if he can not obtain the necessary funding from equity investors. Additionally, ownership may want to use debt to finance the operation if it is extremely confident that the business will be a “home run,” as once the loans are paid off the entrepreneur alone will reap the benefits of the business’ success rather than being forced to share profits of with passive equity investors on an indefinite basis. Equity Financing. The entrepreneur wishing to fund his venture through equity financing sells a percentage ownership interest in the enterprise (typically in the form of stock of a corporation or units of limited liability company interest) to investors in exchange for cash. Investors may be friends and family, “angel investors” or venture capital firms. The entrepreneur and the investors share ownership of the operation and its profits and losses. Unlike a debt-financed business, the equity-financed venture may reinvest revenue generated from operations to expand or “grow” the business rather using those funds to make fixed monthly loan payments. Ownership also avoids making personal guaranties or granting a senior security interest in the assets of the business to equity investors. Passive equity owners reap the rewards of their investment only when there are excess monies available, pursuant to negotiated arrangements between the entrepreneur and the investors, and/or upon sale of the operation. Successful operations typically pay dividends and make distributions to investors on a quarterly or semi-annual basis. One benefit of equity financing is the increased net worth of the business as there is no liability associated with large debt repayment obligations. This increased net worth permits the business to be more creditworthy - and therefore a better candidate for any debt financing that may be necessary to get the business on its feet. Business owners often use a mix of equity and debt financing to start their business. For example, the entrepreneur will gather investors to fund the business portion of the endeavor and obtain a bank loan for a majority of the purchase price of the real estate where the business will be located. In another scenario, the entrepreneur may wish to sell only a certain percentage ownership in the venture but need monies in excess of the amount received from investors to get the business up and running – he may acquire this capital through a mix of debt and equity financing. NEED LEGAL HELP OBTAINING FINANCING FOR YOUR BUSINESS?
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CLICK HERE TO RETURN TO THE ENDEAVORLEGAL, ATTORNEYS AT LAW: GARDEN CITY | LOS ANGELES | BOSTON BUSINESS LAWYER MAIN PAGE © 2007. ENDEAVORLEGAL, ATTORNEYS AT LAW. ALL RIGHTS RESERVED. LEGAL DISCLAIMER & TERMS OF SERVICE *ENDEAVORLEGAL'S PRESENCE IN GARDEN CITY, NY IS COURTESY OF THE LAW OFFICE OF JASON R. CORRADO |
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