Purchasing a Business

There’s no doubt that small businesses and startup have faced a myriad of macro and socioeconomic challenges of late, from the coronavirus pandemic and its associated lockdowns to rampant inflation and the cost-of-living crisis.

This cumulative disruption has had a direct impact on the number of active small businesses in the UK, which has fallen from 5.9 million at the beginning of 2020 to just 5.6 million today.

Business funding remains a significant issue for startups, especially as some lending structures are more complex than others. But in what circumstances will you need to call on a solicitor? Let’s find out!

Debt Funding

In many instances, you may choose to fund your business by borrowing capital directly from a third-party lender.

This type of loan is usually secured against either personal or existing company assets, typically at a competitive rate of interest due to the deployment of valuable collateral.

This cash will then have to be repaid according to the terms of an agreed payment plan, which can put your assets at risk if your default on the loan. However, this is an accessible and affordable way of raising cash for your business, while it potentially enables you to partner with a knowledgeable and well-resourced lender.

The advantages of this are that the business owner retains control and interest in the company and therefore will profit from any future sales or profits from the company, without equity shareholders putting claim to it. This form of funding is much easier to obtain than other forms such as equity funding, and the business owner has full control over how the debt funding is spent.

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The downsides being that the debt must be repaid and will require sufficient cash flow to do so. In addition, using this type of equity can restrict a business’s financial activities, and increase its risks to other future lenders as it may require pledging company assets as security for the loan.

Equity Funding

You may also need a solicitor when seeking out equity finding, which requires you to sell an equity stake in your company. The company’s value must be known.

This is a far more complex process, and one that will require an objective company valuation and the development of a comprehensive business plan or proposal.

These factors will combine to effectively sell your company and a specified stake to serious equity investors, and your solicitor will ensure that this process is managed as smoothly as possible (while potentially helping you to secure the best value deal).

The advantages of this are there are no monthly repayments to be made from your cashflow, meaning you have profits freed up elsewhere. With this type of funding its more of a relationship than a transaction meaning you could benefit from mentoring, experience and business contacts rather than just receiving the cash.

The only downsides being that it can take a longer amount time to raise capital than debt funding. You will also be sharing ownership with equity investors.

Which Other Types of Borrowing Require a Solicitor?

Ultimately, you may need a solicitor for any type of borrowing, depending on the sums of money involved and your underlying business model.

For example, you may need a legal agreement to establish the terms of a joint business venture, while even borrowing cash from family may need to see some form of official repayment agreement.

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As you don’t want to fall into the trap of leaving your business legally unprotected just because you have a close relationship to the family lender. As it could turn sour.

Venture capital agreements can also require a solicitor’s help to set up, and it’s important to consider the unique circumstances surrounding your borrowing to ensure that you complete the transaction as quickly as possible.

This will also help to ensure that you seek out advice where necessary, and avoid entering into agreements that aren’t beneficial for your business.

1 thought on “Financing Your Business – When Do You Need a Solicitor?

  1. Your , Post is very useful.Thank you this usefull information. When starting up a business, the simplest and safest route is to contact a solicitor. They will guide you through every step of the process. They will discuss your ideas, your lifestyle, and your business goals. They will carefully draft your legal documents, and on completion, they will offer you advice and guidance.

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