Legal issues Comparing Loans and Equity Investments

by Fred Abramson on July 5, 2011 · 0 comments

Lemonade Stand

Image by cmiked via Flickr

When starting a business, you probably need to finance part of it. After looking at you own pocketbook, which usually includes any savings, raiding your retirement account or if you are lucky any inheritance money from Aunt Matilda you probably need more money. There are two sources of outside funding: equity investment and loans.

Loans: The Pro’s and Con’s.

You probably don’t need me to tell you what a loan is. If you want to open a lemonade stand, your parents lend you $10 with interest of 2% and you promise to pay them back with interest at a later date.

While your dad was able to simply open his wallet to provide you with an infusion of $10 when you were eight, he might not be able to lend you a more hefty sum now. One step is to contact a commercial lender. I have the name of a fantastic bank lender that could help you out. However, the bank needs to make sure that it will be paid back. This requires security, often in the form of a mortgage. Bank loans often require a personal guarantee, which means that you are responsible if the business fails.

The big plus of obtaining a loan as compared to selling an equity stake is that if your business becomes successful and your profit is larger than you interest payment, you keep everything in the future and do not have to share them with investors.

If you have equity investors, you do not have to repay the investment that your investors put into your company if your business fails. However, you can also be subject to a lawsuit by your investors if they think that you misinformed them. Since an equity investor is a shareholder in the company, they may also require a voice in the running of the business.

The Law Office of Frederic R. Abramson represents start-up businesses in New York. If you have a question regarding equity investments and loans feel free to contact me at 212-233-0666.

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