The costs and risks involved in the first few years of operating a business may be frightening. Careful planning will help to reduce the risks. Facing realities about your financing needs and diligently preparing your business plan will help you to overcome the costs involved. The investment community is not willing to grant loans or invest in your business unless you provide them with something worthwhile to invest in. The following considerations and suggestions will help you to gain the trust of investors and meet your financial needs.
- Retain Accountant’s and Attorney’s services – Although the expense may seem burdensome at first, accountants’ and attorneys’ services will save you money in the long run. The hourly rate of a competent advisor is little compared to the cost of losing your business or being held liable for its mistakes. These advisors will help you to structure your business properly and take steps to help it responsibly. Some accountants and attorneys even provide flexible payment options for young businesses.
- Establish the Necessary Structure – While many entities are available that provide differing advantages, structural differences may affect your ability to obtain financing without losing control of your business. If you have any aspirations of developing it into a publically traded entity, you will need to know about the structure of a C corporation. Before you approach your first investor, you need to decide the number of shares of stock to authorize, whether more than one class of stock will be necessary, and how many shares to retain yourself.
- Prepare Your Business Plan – The first step in your search for financing, if not a preliminary step in creating your business, should be ensuring that you have developed your dream into a coherent, well-crafted business plan. Your plan should provide potential investors with a comprehensive view of the structure and your conclusions about it, a realistic operating plan that you intend to abide by, potential risks, the position the business can pretty safely expect to be in over the next six months and over the next year, and possible the comments about your hopes for further developments. In addition to providing investors with valuable information, your plan will cause you to focus your attention and force you to look at every opportunity and every risk that comes with it with a clear eye and a level head. Periodically updating your plan will help you to gauge your progress and enhance your ability to make realistic predictions.
- Decide Between Loans and Equity Offers – Before considering financing, and possibly in the course of developing your plan or through other research, you should gain an understanding of the costs involved in operating the business. Remember that many young businesses operate for at least three years without any profit. Unless you start it with old money, you will need to explore the possibility of loans or raising money by selling partial ownership of it in equity offerings. While loans may allow you to retain ownership and control of the business, often, institutional lenders will be hesitant to help finance a new business. Accordingly, you may have to sell equity to meet its financing needs. Depending upon the uses, this may be through the sale of shares of stock, membership interests, or partnership interests. In selling equity, you and must exercise care so as to prevent giving control of the business to investors and to ensure compliance with federal and state regulations affecting such sales.
- Differentiate Among Investors – Federal and state regulations affecting the sale of equity in businesses, generally referred to as securities regulations, differentiating among types of investors. Accordingly, in selling equity in it, you will need to differentiate between investors to ensure compliance with securities regulations. For most young companies, the investor of choice is an accredited investor. Generally, accredited investors have the financial resources and knowledge to rationally make investments. Regardless of the type of investor involved, the business must make certain disclosures regarding the business’s financial resources and its business plan. Before accepting money from anyone, the business must know which type of investor it is dealing with, what the investor needs to make an informed decision, and which laws affect the transaction.