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Raising capital is an important step for many businesses. The two main methods are debt financing and equity financing, each with specific legal and financial implications. Understanding these options can help businesses make informed decisions.

Listen and stay informed!

Debt Financing

Debt financing involves borrowing money from lenders with a commitment to repay over time, usually with interest. This method does not involve giving up ownership in the company.

Key points to consider:

• Retains company ownership but creates repayment obligations.
• Personal guarantees may put personal assets at risk.
• Covenants may restrict certain actions, such as taking on further debt.
• Failure to meet repayments can lead to asset seizures or insolvency.

Legal documentation includes:

• Loan agreements that detail repayment terms.
• Security agreements that specify collateral.
• Personal guarantees that provide additional security for lenders.

Equity Financing

Equity financing involves raising funds by selling shares to investors. This method avoids repayment obligations but involves sharing ownership and decision-making authority.

Key points to consider:

• Avoids regular repayment obligations.
• Investors may seek influence over company decisions.
• Ownership is diluted to secure funding.
• Investors often have plans for exiting their investments, such as share sales or public offerings.

Legal documentation includes:

• Term sheets outlining preliminary agreements with investors.
• Shareholder agreements setting out rights and obligations.
• Amendments to articles of association to reflect changes in governance or structure.

Government Schemes: SEIS and EIS

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are government-backed initiatives that encourage investment in startups by offering tax relief to investors.

Key points to consider:

• Provides tax relief to reduce risks for investors.
• Offers potential exemptions from capital gains tax for successful investments.
• Requires companies to meet criteria set by HMRC.
• Documentation must comply with legal and regulatory requirements.

Conclusion

Debt and equity financing have distinct considerations. Debt financing allows businesses to retain ownership but requires regular repayments. Equity financing provides funding without repayment obligations but involves shared ownership. Government schemes such as SEIS and EIS provide additional options for securing early-stage investment.

This podcast is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this podcast was published.

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