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What Are the Financing Options for My NJ Business?

By |2021-01-19T18:26:12-05:00January 19th, 2021|

WHAT ARE THE FINANCING OPTIONS FOR MY NJ BUSINESS?

In Hamlet, Act I, Polonius says “neither a borrower or lender be.”  Obviously, Shakespeare did not like debt.  The U.S. tax code and Federal bankruptcy law, however, do like debt since all of the interest on a business loan is fully deductible, and most debts can be discharged in bankruptcy court.  So the question arises, should I finance my business purchase or startup with debt capital, equity capital, or some combination thereof?   Here are the basic answers to  this question.


Debt Financing Options

If you borrow money to purchase or start a business, it is virtually certain that you are going to have to personally guarantee the loan.  If the business fails, barring filing bankruptcy, you are going to have to repay the loan.  The advantages of debt financing are that the interest is fully deductible, and as the loan is repaid, you build equity in the business. When the entity is eventually sold, the entire proceeds of the sale are yours. Additionally, you have total control over the day to day operation of the enterprise. 

Equity Financing Options

Equity financing consists of your own funds that are used to begin the business, as well as monies belonging to outside investors who expect a return on their investment,  as well as eventual repayment of the investment.  There is, however, no legal obligation on the part of the promoter to pay the investors anything if the business does not succeed.  Regardless of whether you decide to purchase a business or start one, if you choose to go the equity financing route, you are almost certainly going to have to relinquish  a majority percentage of the equity to the investors, especially if you are investing little or no capital of your own. 

Know Your Responsibility

It is extremely important if you decide to go the equity route that the legal documents clearly state that the investors investment is equity and not debt. Never accept equity capital on the proverbial “handshake” since if the business fails, the investors will often claim that they loaned you the money and that they want repayment. You just know what the options are in financing your NJ business. If you organize your business as a limited liability company, the operating agreement is the controlling document, and if you are a corporation, then the articles of incorporation control.  Finally, if you are an employee working for a promoter who asks you to accept a below market salary in return for equity, never agree to this without the arrangement being in writing since dishonest businesspersons will often deny that they agreed to this years down the road if the business is successful and is sold. 

 

This article is not intended to be a rendering of legal, accounting, tax or other professional advice.  Assistance from a competent professional in these specific fields should be sought. 

PLUTUS ADVISERS: HOW SHOULD I FINANCE MY NJ BUSINESS?

By |2021-01-05T13:48:06-05:00January 5th, 2021|

HOW SHOULD I FINANCE MY NJ BUSINESS?

In Hamlet, Act I, Polonius says “neither a borrower or lender be”.  Obviously, Shakespeare did not like debt.  The U.S. tax code and Federal bankruptcy law, however, do like debt since all of the interest on a business loan is fully deductible, and most debts can be discharged in bankruptcy court.  So the question arises, should I finance my business purchase or startup with debt capital, equity capital, or some combination thereof?   Here are the basic answers to  this question.

If you borrow money to purchase or start a business, it is virtually certain that you are going to have to personally guarantee the loan.  If the business fails, barring filing bankruptcy, you are going to have to repay the loan.  The advantages of debt financing are that the interest is fully deductible, and as the loan is repaid, you build equity in the business.  When the entity is eventually sold, the entire proceeds of the sale are yours.  Additionally, you have total control over the day to day operation of the enterprise. 

Equity Financing Considerations

Equity financing consists of your own funds that are used to begin the business, as well as monies belonging to outside investors who expect a return on their investment,  as well as eventual repayment of the investment.  There is, however, no legal obligation on the part of the promoter to pay the investors anything if the business does not succeed.  Regardless of whether you decide to purchase a business or start one, if you choose to go the equity financing route, you are almost certainly going to have to relinquish  a majority percentage of the equity to the investors, especially if you are investing little or no capital of your own. 

It is extremely important if you decide to go the equity route that the legal documents clearly state that the investors investment is equity and not debt.  Never accept equity capital on the proverbial “handshake” since if the business fails, the investors will often claim that they loaned you the money and that they want repayment.  If you organize your business as a limited liability company, the operating agreement is the controlling document, and if you are a corporation, then the articles of incorporation control.  Finally, if you are an employee working for a promoter who asks you to accept a below market salary in return for equity, never agree to this without the arrangement being in writing since dishonest businesspersons will often   deny that they agreed to this years down the road if the business is successful and is sold. 

 

This article is not intended to be a rendering of legal, accounting, tax or other professional advice.  Assistance from a competent professional in these specific fields should be sought. 

FINANCING ISSUES AND THE SALE OF YOUR BUSINESS

By |2020-09-21T09:29:20-04:00September 21st, 2020|

When a business owner is considering selling his or her business, too often s/he gives too little thought to how the buyer is going to pay for the purchase; this is often thought of as the buyer’s problem.  In reality, of course, it is the seller’s problem if s/he wants to have a consummated transaction.  

Most prospective business buyers do not want to pay all cash, even if they have the wherewithal to do so.  Generally, there is a down payment of between 10 and 25 percent, with the balance financed by a financial institution, by the seller,  or by some combination thereof.  Most business buyers attempt to finance the purchase through the SBA (Small Business Administration) since, unlike conventional lending, the SBA will make cash flow based loans that are not fully collateralized. 

As a prospective seller, you should be aware of what financial institutions look for in making a business purchase  loan decision.  Beyond good credit on the part of the buyer and an adequate down payment, the lender is going to require the following:

  1. Industry experience on the part of the buyer. Has the buyer managed, or at least worked in, the industry that the business that s/he wants to purchase is part of.
  1. Provable cash flow on the part of the business.  The cash flow has to be adequate to support the debt service i.e. payment of principal and interest plus some cushion in the event that business falls off.
  1. Can the buyer make a living.  In addition to cash flow being adequate to support the debt service, plus a cushion, there should be adequate cash flow to provide the buyer with a salary at least equal to what s/he would earn in the same industry as an employee. 
  1. Will the seller provide some financing?  While not a requirement, it does give a financial institution some additional comfort in that it shows that the seller has confidence in the continuity of the business, as well as confidence in  the prospective buyer’s ability to manage it successfully.

Insofar as seller financing is concerned, if there is a financial institution providing financing  along with the seller, the seller’s legal position will almost always be subordinate to the bank.  If you would like a cost free consultation regarding financing the sale of your business please call Brad Palmer, C.P.A. at Crown Business Brokers, LLC.  (908) 931-9300.. 

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