by Sarah Byrne
Money is necessary in order to operate your business—you need to purchase goods and pay employees, taxes, and bills. It’s no wonder that there’s so much talk about cash flow for businesses, but this also means that sometimes they need a little help accessing cash. As a result, businesses often find themselves seeking ways to raise funds or access capital, generally in the form of debt (often from financial institutions) or equity (often from investors or venture capitalists).
Should we raise funds?
When determining whether your business should raise funds, you should consider the following questions:
* Is it the right time?
* Is it the right institution or investor?
* Is it the right deal?
When determining if it’s the right time to raise funds, there are many variables and factors to consider, all of which will be unique to your business. Current cash flow is always at the forefront. Do you have enough cash to keep operating? If so, how long can you sustain yourself? You may also want to consider what access to capital could do for your business. Could you accelerate your growth? Can you increase the value of your business by strategically directing cash into areas such as production or marketing?
It’s also important to note that not all financial institutions and investors bring the right solutions to the table for your particular business. This sort of relationship should be a two-way street, and whoever you’re working with should be a good fit for you, your team, and your business needs.
Finally, all cash is not equal. Always consider what you’re giving up, or what constraints are being placed on you. If you’re taking on an equity partner, what impact does it have on your ability to control your business? If you’re taking on debt, are there limits on what you can do with the cash?
How do we get ready to raise funds?
You will need to get your books and records together and organized, so that they can readily be provided to a financial institution or investor. Here are some questions you should always consider:
* Is the corporate minute book in order?
* Is tax restructuring required?
* Are employment relationships formalized and documented?
* Who are your material customers and suppliers?
Having proper, organized documents will put you well on your way to addressing some of the key questions that financial institutions and investors will inevitably ask.
What could hinder your ability to raise funds?
Seeking funding before you’re ready is perhaps the most common pitfall when it comes to raising funds, and can significantly slow down the process, or even turn away financial institutions or investors. Prior to seeking funds, you should be cognizant of the following potential concerns:
* agreeing to any funding terms before receiving professional advice
* difficulties in valuing your business, particularly when still pre-revenue
* intellectual property that is not secured or organized
* undocumented agreements, including employment agreements or material agreements with customers and suppliers
* agreements or rights that could impact your share structure
Raising funds can be a time-consuming and exhausting process, but when done properly, can be a tool for helping your business flourish. A strong network, together with preparation, organization, and proper documentation go a long way in making the fund-raising process easier and more efficient.
Sarah Byrne is a corporate and commercial lawyer in the St. John’s office of Stewart McKelvey, with a practice that focuses on businesses and organizations of all shapes and sizes. With practical experience working in businesses of all sizes, and being an entrepreneur herself, Sarah has a grounded understanding of the concerns and pressures that her clients face and an appreciation for what they deal with on a daily basis.
If you have any questions, please contact Sarah at 709-570-8845 or sbyrne@stewartmckelvey.com
These materials are intended to provide brief informational summaries only of legal developments and topics of general interest. These materials should not be relied upon as a substitute for consultation with a lawyer with respect to the reader’s specific circumstances.
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