There’s a great new place for Colorado business owners to get started planning funding to drive growth: a coalition of private and public organizations, led by the Colorado Bankers Association, recently launched a new website to help small businesses find financing sources. The website features a wide array of resources for closely held Colorado business owners, including a matrix of lenders and suggestions for those preparing to seek new financing.
Let’s say your company needs additional capital to expand. Click here for information on various financing options for closely held businesses. As you review financing options, you should look ahead by identifying the optimum financing strategy for your business and then take steps to best position the business to attract the desired financing. During this planning process you may discover it’s time to address the capital structure of your business entity.
Why would you change your capital structure? The reason is: collateral. When you first established your business entity, you likely structured it so as to minimize risk to the business owners, minimize taxes and maximize return – and it’s working.
In its article, Financing Growth, the SBA points out that virtually all lenders require businesses to produce a history of financial statements that support its business plan and cash flow projections. If historical financial statements do not support your cash flow projections, lenders typically expect business owners to put up personal assets as collateral as a condition for financing. Successful business owners seeking first stage financing are often surprised to learn they are still being asked to pledge personal assets as collateral. Yep, it sure can be frustrating – it feels like lenders only want to lend money to those who already have money. A more sophisticated alternative to relying solely on the personal collateral of the business owners is to re-evaluate how your business is structured and capitalized.
Start-up businesses are typically very thinly capitalized – business partners avoid putting too many personal assets into a brand new business and are quick to distribute excess capital. But as the business grows and begins positioning itself for growth — and financing that growth – such a structure may no longer suit the needs of the business. It may make more sense to build capital in the entity that can be used as collateral and serve to limit exposure of the personal assets of the business owners.
Is it time for your business to “grow up” and start building capital in the entity?
When it’s time for your business entity to grow up, consult with your CPA and your business attorney about options for your entity and capitalization structure. If you would like to discuss legal issues facing your company, please contact our Business Law Group partner, David A. Closson at [email protected].