San Diego Business Lawyer Blog
Continued from Be Prepared Before Undertaking a New Business Venture.
Marshalling the resources necessary to fund a new San Diego business can be intimidating. In fact, it’s probably the biggest reason many decide against a new venture. How in the world will I come up with the capital necessary to: purchase an inventory; purchase equipment; lease commercial space; hire employees; pay an accountant and/or a business attorney; and/or pay for insurance? And even if I come up with the necessary funding to open my doors, will I be able to continue paying the company’s expenses? What about my personal expenses? These are important questions and they require a funding plan that takes into account start up requirements as well as the company’s short term and long term financial needs.
To properly evaluate a business’ capital needs, it’s important to have a strong business plan that clearly defines the company’s strategy for success and sets forth detailed projections of the company’s short term and long term finances. It will also define how an infusion of capital will be spent (whether on operating expenses or capital expenditures necessary for real estate and equipment). A critical analysis of the financial landscape aids in determining just what level of funding is needed and whether additional funding will be needed down the road. The more detailed and well reasoned your business plan, the more likely lenders and investors will provide needed capital. They will want to know how the money will be spent.
There are numerous ways to finance a new business’ operations. In most cases, new businesses are funded via a combination of resources. Personal assets, credit cards, bank loans, third party loans, 2nd mortgages, loans from friends and family, partners’ capital, sale of a corporation’s shares or a limited liability company’s membership interest, venture capital, sale of personal assets such as stocks, automobiles and boats are all common and legitimate means of raising capital. The first step is to inventory your personal resources. Whether via the sale of assets, withdrawal of cash from checking and savings accounts or via a second mortgage on your home, tally the dollar amount of the investment you are able to make. In deciding the amount of personal assets to invest in your new business venture, be sure to consider the need to meet personal expenses over time (preferably two years). Under your business plan, will you be paid a salary? Will you have enough money set aside as a cushion should the business prove unable to pay your salary or worse fail? These are important questions. Remember that you can opt to keep some reserves and make up the difference in needed capital via other means.
If you do not have any personal assets or your personal assets aren’t enough to adequately fund the business, you can seek out loans and/or investors. Loans (debt financing) are available from multiple resources including banks and other third party lenders. People typically underestimate their ability to obtain loans. They worry that they lack sufficient credit and/or collateral to qualify. Regardless of your credit worthiness, take the time to investigate borrowing prospects. A good place to start is with the Small Business Administration (SBA). In addition to assisting new businesses raise capital, the SBA has a wealth of resources available to help guide young business owners through the maze of business ownership. The SBA is an often overlooked resource. It shouldn’t be. Finally, consider working with existing lines of credit. So long as you have a sound business plan and have taken into consideration the need for a personal cushion, existing lines of credit can help you get off the ground.
Bringing investors on board is less risky than taking out loans. In most cases, new business owners personally guarantee business’ loans. Investors inject equity into the business taking on risk in exchange for a share of the profits down the road. You essentially sell a share of the business, and in most cases cede some of the control to your new partner. Start with friends and family. It’s surprising how many people are interested in a good business idea. In addition, networking with professionals, business owners and others experienced in your particular industry can be a great source of investment. There is no single best source for finding investors. However, there is a wealth of information on the internet regarding a wide variety of investment sources from angel investors to venture capitalists.
Inadequate funding is one of the top reasons new businesses fail. The key is to look to as many potential sources as possible and choose those most suited to the new business’ needs. In the end, a strong business plan is necessary to attract serious investment. Once investment or debt equity is lined up, consider consulting with a San Diego business attorney to assist you with any requisite contracts.
Continued in Choosing the Right Business Entity for Your New Business.