Now that you have an LLC, you are likely worried about securing the necessary funding for your business venture. Many people opt to secure bank loans to fund their costs, but this method requires banks to run your credit history, something you may not have if this is your first business. Rather than opting for privatized loans, which can carry extremely high interest rates, many people try to secure independent investors. There are several factors involved when deciding what form of financing is fiscally responsible for your business, such as your prior business history, future strategy, and what sector of business you are pursuing. Traditional loans available to new businesses will typically all require personal guarantees, which means if your business folds and can’t meet the debt obligations then you could be required to repay the funds personally. Here are several methods of financing to consider:
Rollover for Business Startups (ROBS)
A ROBS provides individuals with the option to invest their deferred retirement funds into the LLC to avoid paying income taxes or early withdrawal penalties. A ROBS essentially rolls over the value of your current retirement fund as capital for your business. A ROBS has startup fees and maintenance fees as well. A ROBS is not a loan. Rather, a ROBS acts as a personal guaranty for your business. If your business fails, you may lose the value of your retirement fund.
Home Equity Loans (HEL)
A home equity loan can be secured to fund your business. Your HEL amount is based on the equity value of real property you own. These loans require a personal guaranty, but the loan, once granted, can be used for virtually anything, including funding your business.
This is by far the most traditional method of securing capital for your business. To secure a bank loan, a bank requires a business plan and a good credit history. Bank loans also require a personal guaranty in the event the business defaults.
Small Business Administration (SBA) Loans
SBA loans are a great way to fund a business as they carry some of the lowest interest rates for business loans. However, SBA loans have many requirements that make it impossible for new businesses to secure SBA loans. SBA loans require a consistent profitable growth and a two-year business history.
Another way to get significant seed capital is through investors. Investors can be as hands-on or as hands-off as you want, depending on what your business goals are. Angel investor relationships are usually contractual relationships wherein the angel investor invests capital and the LLC promises x amount of return on investment. Angel investors are often the most hands-off approach in investing to provide you with the freedom of running your business without significant involvement from the investor.
If your interests align with certain investors, you may consider bringing them in as a partner in the LLC. If you bring on individuals as investors in your LLC, you need to make sure to outline the terms of the partnership in the Operating Agreement. Your Operating Agreement is the document that addresses any issues that may arise in the course of the partnership. You want to ensure that your business continues to run smoothly with the money brought in from the new individual investor. If you do not clarify in advance, you could subject your company to infighting regarding the sale of an ownership stake or interest, the profit distribution schedule, management control and strategic focus.
Uplift Law can help you navigate safely bringing investors into your business. We specialize in helping small businesses grow through clear Operating Agreements and the ability to navigate the difficulties of starting your business. Contact us today!