Starting or growing a business in Alabama takes financial resources that many businesses simply do not have on hand, so they have to consider other options. Finding the right way to finance the business is critical. Likewise, avoiding mistakes will help prevent delays.
At Ritchey Legal, PLLC, our business lawyer inBirmingham and throughout Alabama helps businesses regardless of their life cycle. If you are a start-up, a small business looking to scale, or an already-established family-owned corporation, we will assist in the discovery and obtainment of the right financial support to propel your business and meet your goals. Contact us at 205-225-9225 to schedule a consultation and to learn more about all of our business law services.
Types of Business Financing in Alabama
When starting or running a business, one of the most important questions is how you intend to fund it. If you don't have sufficient money yourself, then there are several other financing options you can consider.
Debt financing involves borrowing funds from a creditor. These funds must be repaid with interest, usually via regular preset payments. Bank loans are a common example of debt financing. Debt financing options can be both short- or long-term, depending on the intended purpose of the money.
Some creditors require the debt to be secured or attached to collateral. This is an asset the creditor can use in the event you fail to make repayments and default on the loan.
Different sources of debt financing include:
- Traditional or non-traditional banks, including loans, lines of credit, and credit cards
- Commercial finance companies
- Debt crowdfunding
- Peer-to-peer lending
Some government programs or agencies also offer assistance to small businesses seeking debt financing. For example, the Small Business Administration backs loans from certain banks, making it easier for small business owners to access capital.
Equity financing involves an individual or company investing in your business in exchange for owning a percentage of it. Unlike debt financing, investors are not repaid. Instead, they receive some of your business profits.
Investments can come from:
- Angel investors
- Venture capitalists
- Investment banks
- Large corporations
- Equity crowdfunding
Equity financing can be complex. It requires issuing membership units (in the case of an LLC) or stock (for a corporation).
Other Types of Financing
In addition to debt and equity financing, a range of federal and state government industry-specific grants are available to small businesses if they meet certain criteria.
Leasing is another alternative to equity or debt financing. It is often available where you require a large piece of equipment or premises to start your small business but cannot purchase them outright.
Many businesses structure a combination of different types of financing. Each type of financing comes with potential advantages, disadvantages, and risks. For this reason, it is important to seek legal advice from a business attorney and financial advisor before choosing one.
Comparing the Advantages and Disadvantages of Business Financing in Alabama
Advantages and disadvantages flow from both debt and equity financing. It is important to understand what to expect from each type of business financing. Likewise, keep in mind that each financing situation is unique, and so not all benefits or disadvantages will apply.
Debt Financing Pros
One of the main advantages of debt financing is that it allows you to retain full control over your business. Unlike equity financing, you're not giving away any ownership in exchange for an investment.
Debt financing involves an arms-length arrangement. The clear terms of the loan mean repayments are predictable and can be easily budgeted for. There is also a clear end date marking the termination of the commercial relationship between the parties.
The interest you pay on debt financing is also tax deductible.
Debt Financing Cons
With debt financing, you must use cash to pay back the loan and interest. This can limit your cash flow, which can be difficult when a business is first starting.
Debt financing also relies on a good credit rating. If you do not have one, it can be harder to obtain. Defaulting on a business loan can also have consequences for your future credit rating.
Debt financing can also be risky, especially if the lender requires security. They may want to guarantee your loan with a personal asset.
Equity Financing Pros
Equity financing offers a source of capital without going into debt or having to pay interest. The absence of new debt and interest payments should lead to increased cash flow, which can be reinvested in the business and not to debt repayment.
Equity financing also gives you access to potentially large amounts of capital, which is helpful for scaling up a business quickly. It can be a good option if you are looking to develop a long-term business relationship with your investors, and they are interested in jointly building a business with you.
Equity Financing Cons
As the business owner, you lose some ownership—and therefore control—over the business via equity financing. Investors may expect to have a say in how the business is run, which can lead to complicated and time-consuming arrangements.
Equity financing also typically requires extra administration, such as regular reporting to investors. Finally, if your friends or family invest and the business does not succeed, this failure can lead to strained personal relationships.
How a Business Financing Attorney Can Help in Alabama
A business lawyer can be a strategic partner in the growth of your business. Alongside other business law services, our business attorney in Alabama can help you secure financing and minimize risk.
- Planning. A business financing lawyer will review your finances, business goals, and financing options to determine which are best aligned with your financial needs in the short- and long-term.
- Applying. A business financing lawyer will gather supporting documents as well as review and help complete the right forms.
- Securing. A business financing lawyer can help you properly and timely submit business financing applications or forms to secure the funding.
As implied by the various advantages and disadvantages of business financing, a lot of factors must be considered. You want to make sure you adequately plan, properly apply, and timely secure the right funding. Doing so will help you avoid delays and grow your business.
Contact a Business Financing Attorney in Birmingham and throughout Alabama Today
You want your business on a strong financial footing, especially given the current volatility in the market. If you want to establish a solid foundation, contact Ritchey Legal, PLLCtoday. Our business law attorney in Alabama can be reached by either using the online form or calling us at 205-225-9225 to schedule a consultation. We look forward to doing business with you.