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Business Financing
Often the principals establishing a business invest an adequate amount
to meet the initial operating costs. However, at some point the business
will need outside financing, either a loan with a promise to pay interest
and a repayment schedule or an equity investment, which has no obligation
to pay interest or to make payments on a schedule. In order to obtain
any type of financing, the business will have to develop a business plan
that contains financial statements.
To obtain a loan, if the business is not secure enough, the lender will
require the principals to make personal guarantees to repay the loan.
To repay a loan, the business must have immediate prospects of generating
revenues.
To obtain equity financing, you are faced with a complex undertaking
and need to understand the complexity of the undertaking. The most
important consideration in obtaining equity financing is the management
of the business - the management's quality and the control the passive
equity investors will have over the management. Be aware that before selling
an equity investment in your business, you must comply with federal and
state securities laws, laws that impose great liability if you do not
comply strictly. Consult a lawyer before selling an equity investment
in your business. A security is defined very broadly so the sales of anything
that could be construed as an investment interest is considered a security,
no matter how you define it. Virtually all sales of limited partnership
interests are considered sales of securities. Securities laws impose significant
disclosure and regulatory obligations. The main aim of such laws are to
prevent fraudulent promises made in selling an investment. Exemptions
from many of the disclosure and regulatory obligations exist for the small
business, but you must work closely with a lawyer in order to fit into
one of these exemptions.
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