Caufield & James, L.L.P Caufield & James, L.L.P

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Sources of new business financing

One of the biggest challenges faced by California entrepreneurs is securing the capital they need to fund a new business venture. Traditional banks adhere to strict underwriting standards and will generally want to see an established track record before they lend money, which means that many entrepreneurs turn to friends, family members and alternative lenders for the cash they need.

Borrowing from friends or loved ones is perilous because business is unpredictable and failing to pay back this type of business loan in a timely manner can strain or even wreck relationships. Online crowdsourcing websites like Kickstarter have become a popular place for entrepreneurs to find backers in recent years, but they are extremely popular and attracting attention can be difficult if ideas are not novel or interesting. Loans guaranteed by the Small Business Administration are another source of seed capital, but qualifying can be difficult for people who cannot put up any collateral or have had credit problems in the past.

Venture capitalists are often willing to take risks that conventional banks would balk at, but they expect healthy profits and may demand a percentage of the business as well as monthly payments in return for the financing. Angel investors are usually industry veterans who may also want an equity position in return for seed capital, but they could provide valuable guidance and their terms are generally more reasonable than those on offer from venture capitalists.

Attorneys with experience in business planning may be able to help entrepreneurs to avoid costly pitfalls by assessing financing packages before documents are signed. Attorneys could also suggest the best way to structure a new business to limit liability and provide tax savings, and they may assist entrepreneurs with regulatory issues like permit and license applications.

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