LEAN HEAVILY ON CREDIT CARDS.
It seems that not a day goes The entrepreneur using by without our family receiving credit cards to finance the an invitation to apply for a new new or growing business credit card. In fact, at least one should simply be aware of them was addressed to one that the cost of easy credit of our sons (who at the time was in third grade). I await is expensive credit. the day when the post office delivers an application addressed to one of our dogs. The number and variety of credit cards available to U.S. consumers and businesses is staggering, and seems unlikely to decrease anytime soon. Setting aside policy questions and concerns about the broader economy, the availability of easy credit has been a tremendous benefit to many small businesses. But it does not come without potential complications. First among those is the question of personal liability. In most cases, the thoughtful entrepreneur will not have started a business in her own name. Rather, she will have formed a corporation or limited liability company and will want to operate the business through that structure so that she can avoid personal liability for obligations of the business. But of course the banks issuing credit cards rightfully want to be repaid. As a result, the fine print in the agreement for a credit card issued nominally in the name of a small business will often provide that the individual holding the card (e.g., the owner of the business) is ultimately liable for repayment of any obligations incurred on the card. In essence, the business owner using a “corporate” card is providing the issuing bank with a personal guarantee. Again, this is not necessarily a bad thing, but the entrepreneur needs to be aware of this fact so that there are no surprises when it’s time to pay the bill. As a secondary matter, the entrepreneur using credit cards to finance the new or growing business should simply be aware that the cost of easy credit is expensive credit. Most commonly, the interest rates associated with these cards (absent a teaser or introductory rate) will be quite high. The savvy entrepreneur uses this type of credit wisely and sparingly, and will most commonly want to keep from carrying a balance if at all possible.
TAP FRIENDS AND FAMILY FOR CASH.
Your parents gave you life. Is it really that much to ask that they also help give life to your business? Possibly. In all seriousness, soliciting funds from friends and family is one of the most common ways to gather initial startup financing. In many respects, it is also one of the riskiest. Before we get to the risks, however, remember that owners of significant equity stakes in
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Soliciting funds from friends and family is one of the most common ways to gather initial startup financing. In many respects, it is also one of the riskiest.
spirits businesses may require vetting with the TTB and state liquor authorities. So before you accept capital from friends and family — or any other party — in exchange for a stake in the business, make sure you’re prepared to address those requirements. Assuming you’re ready to call your cousins and hit them up for cash, let us consider the potential legal risks. When entrepreneurs solicit funds from friends and family, they rarely take the time to appropriately document the transactions that follow. This makes intuitive sense, in that the entrepreneur who thinks her mother is likely to bring legal action against her for breach of fiduciary duty is unlikely to solicit funds from her mother in the first instance. But the slim possibility of future legal action between the parties is not the only consideration. Instead, the entrepreneur should be thinking about how the transaction will impact future efforts to obtain investment in the business from third parties, and even how the transaction may impact the value of the business in connection with a future sale. By failing to observe traditional corporate and legal formalities associated with taking in the investment (even if it is coming from friends and family) the entrepreneur is giving a prospective future investor or purchaser a reason to discount the value of the business. For this reason, the decision to eschew corporate formality in a friends and family deal can be a false economy. By cutting corners and saving costs at this stage the entrepreneur risks a reduction in future value. Of course, legal risks aren’t the only consideration when tapping friends and family for capital. The savvy entrepreneur will also think through the potential ramifications of the investment on her relationships with these folks. Business can be difficult, and many relationships have been soured as a result of disagreements in the boardroom. Before you call your in-laws in an effort to raise the cash needed to buy that new bottling machine, consider the potential change to Thanksgiving dinner conversation if your business struggles. You should not take investment from anyone with whom your relationship isn’t strong enough to survive the failure of your business and the loss of their money. At least not if you hope to continue that relationship.
COURT A FEW OUTSIDE INVESTORS.
Assuming you’ve already solicited An entrepreneur friends and family and they’re now who wants to screening your calls, you might next sell shares in her consider raising business capital distillery corporation from outside investors. But before is offering a security. you start dialing for dollars, you need to be aware of some meaningful legal What does it mean considerations. (Note that these if you’re offering restrictions aren’t limited to soliciting a security? investment from unrelated third parties, they technically also apply to soliciting friends and family for investment. That said, entrepreneurs often begin to focus on these legal requirements once soliciting true third parties, and I’ve yet to see an entrepreneur sued by her mother for securities fraud.)
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