Understanding Small Business Funding Options: Legal Considerations for Growth and Scale

As a small business legal team based in Northern Michigan, True North Legal Group frequently advises clients on financing options tailored to their specific needs.  One of the most common concerns for small businesses is how to access funding for growth and scaling initiatives.

This comprehensive guide will explore various small business funding sources, ranging from traditional bank loans to venture capital and angel investors. Importantly, we'll delve into the legal considerations associated with each funding option to help entrepreneurs navigate this complex terrain successfully.

 

Small Business Financing Options

There are many options for small business financing in Northern Michigan, and they vary based on availability, risk, and other legal considerations.  They include:

1. Traditional Bank Loans: Traditional bank loans are a common financing option for small businesses.  They are often the easiest to get and are routinely offered by national and community banks.  These loans typically require collateral and have fixed interest rates and repayment terms. When considering bank loans, here are key legal considerations to keep in mind:

• Loan Agreement: The loan agreement is a legally binding contract that outlines the terms of the loan, including interest rates, repayment schedule, and consequences of default.  It's crucial to review and negotiate these terms to ensure they align with your business's cash flow projections and growth plans.
• Collateral:  Banks may require collateral to secure the loan.  This could include your business or personal assets.  Before agreeing to a loan, you must fully understand what assets are being pledged and the implications of defaulting on the loan.  You should work with the team at True North Legal Group to protect valuable business assets while obtaining necessary financing.
• Personal Guarantees:  Banks may require personal guarantees from business owners.  This means that if the business defaults on the loan, the guarantor (business owner) is personally liable for repayment.  Carefully evaluate the risks associated with personal guarantees before signing.

2. State Grants: The State of Michigan and local Northern Michigan governments administer robust business grant programs, with small businesses having access to funding sources at the local and state levels. Examples of these grants include Pure Michigan Business Connect, Michigan Economic Development Corporation (MEDC), Traverse Connect, and other sources.If you apply for grants, pay attention to these legal concerns:

• Eligibility:  Ensure your business meets all eligibility criteria, such as revenue size, industry sector, and expected community impact.  You will be required to demonstrate your eligibility and your business’s need for a grant in an application.
• Regulatory Compliance:  State and local grants involve government funding, so there is often a set of requirements for your business after receiving grant money.  These regulations are likely to require you to maintain accurate financial records to demonstrate proper use of grant funds and facilitate potential audits or reviews.  There may be other regulatory limitations, so you should consult with an attorney to ensure compliance.
• Contractual Agreements: If awarded a grant, understand any contractual obligations, such as job creation targets or reporting requirements, that come along with accepting grant money.

3. Small Business Administration (SBA) Loans: SBA loans are backed by the U.S. Small Business Administration, making them more accessible to small businesses with lower credit scores or limited collateral. Legal considerations for SBA loans include:

• SBA Loan Requirements: Understand the specific requirements and eligibility criteria for different types of SBA loans, such as 7(a) loans or CDC/504 loans. Compliance with SBA guidelines is essential to secure funding.
• SBA Loan Agreement: Similar to traditional bank loans and some business grants, SBA loans involve detailed loan agreements. Review terms carefully and seek legal advice to negotiate favorable terms and conditions.
• SBA Guarantee: The SBA guarantees a portion of the loan, reducing the lender's risk. However, borrowers must comply with SBA regulations to maintain this guarantee.

4. Venture Capital (VC): Venture capital is a form of financing typically provided by investors to startups and early-stage businesses with high growth potential.  If you are seeking VC funding, keep these legal issues in mind:

• Equity Stake: VC investors often receive equity in exchange for funding.  Understand the implications of diluting ownership and involve legal counsel to negotiate favorable terms and protect existing shareholders' rights.
• Investor Rights: VC agreements outline investor rights, including board representation, veto rights, and exit strategies. The team at True North Legal Group plays a crucial role in negotiating these terms to balance investor interests with the long-term goals of the business.
• Due Diligence: VCs conduct thorough due diligence before investing. Be ready to prepare comprehensive legal documentation and financial records to facilitate this process and build investor confidence.

5. Angel Investors: Angel investors are individuals who provide capital for startups in exchange for ownership equity or convertible debt. Legal considerations for engaging with angel investors include:

• Investment Terms:  Angel investments can take various forms, from equity to convertible notes.  Work with the legal experts at True North Legal Group to structure investment terms that align with the business's growth trajectory and future fundraising plans.
• Securities Laws:  Compliance with securities laws is crucial when soliciting investments from angel investors.  Angel investment offerings must comply with federal and state regulations to avoid legal complications.
• Investor Relations:  Cultivate strong relationships with angel investors based on transparent communication and legal clarity.  Clear documentation and mutual understanding of investment terms are essential for long-term partnerships.

6. Crowdfunding: Crowdfunding platforms allow businesses to raise funds from a large pool of individual investors. Before your business solicits or accepts crowdfunding, we recommend you think through these legal issues:

• SEC Regulations:  Crowdfunding campaigns must comply with Securities and Exchange Commission (SEC) regulations.  Choose a platform that facilitates legal compliance and investor protection.
• Disclosure Requirements:  Transparent disclosure of business risks and financial projections is critical to gaining investor trust.  The team at True North Legal Group can assist you in preparing compliant offering documents.
• Investor Communication:  Maintain open lines of communication with crowdfunding investors and adhere to legal obligations regarding updates and reporting.

 

Navigating small business financing requires a nuanced understanding of the legal considerations associated with each funding option.  Legal guidance is essential to protect your business's interests and facilitate sustainable growth, whether you're pursuing traditional bank loans, exploring venture capital opportunities, or engaging with angel investors.  

True North Legal Group is committed to assisting entrepreneurs in Northern Michigan with their financing needs, ensuring compliance with regulations, and securing the resources necessary for successful scaling and expansion.  Together, we can help you navigate the complexities of financing and empower your business to thrive in a competitive marketplace.