With expert help, growing businesses need to focus on one of the most important factors that will determine if and how they expand: financing.
Early stage financing can take the following forms:
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1. At its earliest stages, the business relies upon “love money” — from family, friends, or from personal savings or credit and is generally limited to quite small demand loans from people closely related to the business founder(s).
2. Right after the business is established, investment is often needed get the product to market — “angel financing” (generally from high net-worth, risk-taking investors hoping for a very high return. These angels often form groups or syndicates to spread the risk among their members and often take equity positions in the company.
3. Venture capital, typically, becomes available once a startup company has business activity and is showing some growth but cannot draw upon traditional financing from financial institutions and banks. Again, high rate of return, and high risk for investors.
4. Credit from financial institutions and banks. Not to say that this is the end of a startup business’ financing woes, but it opens doors.
As the business grows, the financing becomes more complex and you will need a lawyer to steer you through the documentation.
It’s a battle but well worth it.
Jeffrey D. Cowan, B.A., B.Comm, LL.B., M.B.A., appears in Your Money every other week. E-mail firstname.lastname@example.org call 416-363-5046 with questions for future columns. This article should not be relied upon as legal advice.