Raise capital for your business

There are generally two categories of financing available for businesses. These are debt finance and equity finance. Debt finance is borrowing money or other forms of value in exchange for repaying the debt at a later date, usually with interest. Some common forms of debt finance are bank loans or loan notes which can be redeemed at a future date.

Equity finance involves raising capital for your business through selling parts of your business to investors or shareholders. Some common sources of equity finance are from wealthy private investors known as 'angels', venture capital firms and private equity firms and the issuance of new shares to shareholders.

For further information read Funding your business.

Loans are a form of debt finance which covers borrowing by companies. Loans can be obtained from banks or credit unions, other businesses and even family and friends. The advantages of obtaining finance through debt and borrowing is that you won't need to give away any equity in your business and it also allows for any existing shareholders to retain their shareholdings without diluting them. However the disadvantages are that if your business is new without any trading or credit history, it may be difficult to secure debt finance from banks or other lending institutions or even investors.

When you borrow money from other businesses make sure to use a Loan agreement. The loan agreement will set out the loan amount, the purpose of the loan, when and how the loan will be repaid, any interest payable and whether the loan is secured or unsecured. Whether the loan will be secured will be a matter for negotiation between the parties. A secured loan means that it will rank higher on the list of creditors if the business were to go bankrupt. For further information read Loans between companies.

A promissory note is an unconditional written promise to repay a loan or other debt, at fixed future dates. A promissory note is less formal than a loan agreement but is still legally enforceable. It is suitable for smaller amounts of money. They can also be used by private individuals who wish to formalise debts and loans between themselves. Use a Promissory note if you want to formalise a debt arrangement between yourself and another private individual.

For further information read Loan agreements and promissory notes.

Equity covers all types of shareholding investments in a company. When an investor receives equity in a business they hold ownership of a stake in the business. Equity finance usually comes from issuing shares to shareholders. The shareholders' investment is unprotected and therefore on liquidation or winding-up of the company, they will not recover their funds until all creditors and other costs have been paid in full. However when a company is limited by shares the liability of those shareholders is only limited to the amount they invested.

When you issue shares to shareholders, it may be appropriate to use a Shareholders agreement. This will prevent conflict in the future and also sets out the process of issuing new shares, when there has to be a compulsory transfer of shares and whether the new shares gives the shareholders any rights in managing the company or any voting rights in major decisions. For further information read Shareholders agreements.

In order to encourage investors to invest capital into your business in exchange for shares, you should set out a detailed business plan which includes the forecasted financials for the company.

For further information read Share transfers and issuing new shares.

When you want to propose an investment it's a good idea to lay the foundations for the investment in a Term sheet. The term sheet is a document which sets out the basis for the investment, conditions for the investment, any rights on liquidation of the company and any management rights. It provides guidelines for how the final investment agreement lays the groundworks for negotiation. It is not intended to be legally binding. However certain clauses such as confidentiality clauses and exclusivity clauses can be legally binding on the parties to prevent any leaks of confidential information during the initial negotiations.

A business may wish to raise finance through selling some of their assets. An asset purchase involves the purchase of some or all of the assets of a business. These assets may include fixed assets such as buildings, machinery or trading stock, but can also include intangible assets such as intellectual property or goodwill. An asset purchase agreement is used to document the purchase and outlines the terms and conditions relating to the sale and purchase of assets in a company. For further information read Asset purchase agreements.

A share purchase is when a business sells the shares in their company in order for a buyer to obtain a stake in the business or even complete ownership. The sale of shares within a business is considerably more complex because the sale of shares come with a range of potential liabilities. Tax is usually a huge issue on any share purchase sale. For further information read Share purchase agreements.