Financing your business: when do you need a solicitor?

One of the most common challenges faced by early-stage start-ups and new SMEs financing their businesses is when to hire a solicitor. Toby Harper, founder and CEO of Harper James Solicitors, offers his advice for growing firms looking for finance.

A tricky decision that entrepreneurs face in financing a new business is when to get advice from a solicitor. Funding is an area where professional legal help can really make a difference. If you're looking at bootstrapping or personal finance, you may not need initial legal advice. But if you're exploring equity financing, we recommend that you get legal advice on your position and any agreements you enter into.

There are two main ways of financing your business: debt and equity. A good rule of thumb is that you will nearly always need a business solicitor for equity financing, but not always for debt funding.

Debt funding

This is when your business borrows money from a lender, which will then have to be repaid, usually with interest.

Advantages:

• It's quick and reasonably easy to get, compared to equity funding

• You control how the debt funding is spent

• You keep control and interest in the company, and gain more from any future sale or profits of the company

• You repay the debt over a fixed term, and repayments may be tax-deductible

Disadvantages:

• The debt must be repaid, and be factored into cashflow

• Debt may restrict a company's financial activities, increase its risk portfolio, and company assets may have to be pledged as security for the loan

Equity funding

This is when you sell interest (usually shares) in your business. You need a company valuation, which can be complex for start-ups.

Advantages:

• Typically comes in much larger amounts than debt financing

• No monthly loan repayments, freeing up profits to be used elsewhere

• More of a relationship than a simple transaction: you could benefit from mentoring, experience and contacts

Disadvantages:

• It takes more time and effort

• Greater administrative and reporting burden

• You share ownership, and potentially control

Finance option

What's involved

Do you need a solicitor? If so, for what?

Bootstrapping

You take advance payment before outlaying anything for your products or services. Profits go into the next stage of the business.

No, apart from any other legal advice you may need in the everyday course of running your business.

Your savings

You put your own money into the business.

No, but consider which legal structure of business can provide the best protection for your liability, and maximise your profits.

Family

Family and/or friends may lend or give you the money to fund a part of your business.

Possibly, especially if it's friends rather than family who are putting up the money. It's advisable to ask a solicitor to draft or check a legally binding agreement. If friends/family are being issued with shares in the company in exchange for their investment, instruct a solicitor.

Personal credit (loans and overdrafts)

You borrow from your credit cards and overdrafts and pay it back later.

No, but consider getting advice from a financial adviser.

Crowdfunding or crowdsourcing

Pitching for funding from many individuals on a platform: either donation or rewards-based, or investment in the form of equity (i.e. shares) or debt (i.e. a loan).

You won't normally need a solicitor for donation or rewards-based crowdfunding. It is, however, worth getting intellectual property advice before you make your idea public on a crowdfunding site. Read the terms and conditions of any crowdfunding platform very carefully. Loan-based and investment-based types of crowdfunding are regulated by the Financial Conduct Authority because investors expect a financial return. Donation and reward-based crowdfunding isn't regulated. If you're accessing debt-based crowdfunding, where you will be paying back the cash, or where you will be issuing shares in your company, it's important to protect your business against claims from investors for poor disclosure or poor due diligence. Any shares you issue or shareholder agreements you enter into should follow the correct legal procedure. We recommend a solicitor if this applies to you.

Grants and community schemes

Apply to a community scheme or grant that's relevant to your geographical area, type of business or industry sector.

No, but the selection process is rigorous and it may pay to have a solicitor help you prepare any documentation to strengthen your case, and show that you comply with any regulatory requirements.

Bank financing

Prepare a thorough business plan and present it to the bank.

No, unless you are required to provide a personal guarantee or if the loan amount is a considerable sum and requires the company to enter into complex legal documents. Then seek advice from a banking and finance solicitor.

Joint venture

Do you have business contacts who you can approach as joint venture partners? Or you could use a broker?

Yes. It's wise to get legal advice when drawing up any joint venture agreements, especially if you don't already have a long-standing relationship with the potential partner.

Peer lending

Each platform is different, but it commonly involves filling out your company details, and sometimes some financial statements or business plans.

Probably. Even if the platform or service you're using to find a lending match has its own vetting service, it's still best to have a corporate solicitor advise on any agreements.

Business angel

Check directories and associations to find a business angel best suited to you.

Yes. As with most equity financing, we recommend that you get legal advice when drawing up new shareholder agreements.

Venture capital

It can take a while to find a venture capital firm that's the right fit, to negotiating the details of a deal.

Yes. When you issue equity in your company, you must get legal advice on your position and help with altering any existing agreements, and drafting the new ones.

Convertible loan notes

With the exception of banks, community schemes/grants, and personal credit, corporate investors may consider convertible loans. The process is similar to attracting other equity investors, such as a business angel or venture capital firm.

Yes. The convertible loan note agreement (including the complication of issuing equity upon a certain trigger event) will need detailed legal advice.

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