Raising Private Capital

  • Financing from a third party is often needed to start or expand a business when the personal financial resources of the owner are insufficient to fund the up-front or other capital expenditure needed to generate future projected cash flow.

 

  • When the business owner decides to raise capital from another party, such as a commercial bank or an investor, they also enter into contractual obligations that greatly increase their accountability to that capital provider.  Therefore, third-party funding represents a significant decision in the life of a company and its owner, since defaults on borrower obligations or other forms of issuer projections can jeopardize the future of the business and represent personal liability by the owner and other senior management. 

 

  • The amount, form (debt or equity) and terms of the capital to be raised will be driven by the use of the funds, the nature of the business, financial performance of the business and demand of capital providers for the security offered for by the issuer.  Businesses with stronger historical financial performance or in particularly promising lines of business will have access to cheaper funding and in greater amounts.  “Start-ups” will typically find early capital raising very challenging,  given the greater uncertainly of their business prospects.

 

  • Before raising capital from a third party, the company should assure that the following are in place:
    • A five year business plan incorporating a financial plan that supports the amount and form of capital to be raised
    • Corporate governance documentation and follow-on record keeping.
    • Financial reporting processes are place, ideally including audited financial statements
    • Related party arrangements such as employment, compensation and financing are ready for disclosure to investors 
    • Business processes are well established, with manuals and standard operating procedures in place.
    • Customer records are complete and a sales and marketing process has been established

 

  • A support team consisting of accounting, legal and information technology professionals should be in place to support the due diligence and ongoing reporting that capital provider will expect.   

 

  • Accountants and attorneys are also often a good source of advice on what sources of capital could be available and specific connections to approach for availability.  Highly qualified consultants who specialize in early stage enterprise development and in capital formation are also a good source of advice.

 

  • Private offerings of securities can be conducted directly by the securities issuer or through an agented, “best efforts” process using a FINRA-registered broker dealer as a “placement agent”.  Under US law, only registered broker-dealers can conduct private placements as third-parties and receive compensation for such services.