Three various approaches to start a new company Financial Scotland solicitor

By offering a summary of debt, equity, and hybrid financing choices, this article shows three ways to fund a start-up in Scotland or England & Wales. 

Debt Financing: Loans from Banks

Under this kind of debt financing, a Bank loans money to you, or the company, depending on the legal structure you have selected for it, for a specific use. 

Equity financing is the sale or issuing of shares

Equity finance is the method of capital raising via corporate share sales. Debt and equity financing vary fundamentally in that, in the latter situation, the party pouring capital is doing so as an investor rather than a lender, therefore transforming their money into shares, a percentage of ownership, in the company. This feature of equity financing offers special difficulties since, by the investor’s shareholding, the percentage of ownership in the company the investor gets in exchange for money will eventually define their degree of control during decision-making.

Given the often complicated terms and circumstances of an equity transaction and their often hidden effects, the company and its owners should give legal advice top priority.

Hybrid: Notes of convertible loans (CLNs)

Since they are essentially loans to a firm which will either be repaid or, most usually, converted into equity at some point in the future, CLNs can be seen as a mix between debt and equity financing. For companies registered as a company limited by shares, CLNs thus only provide a funding choice.

Negotiating the conversion of CLNs into shares falls under the responsibility of the corporation and the investor. A future equity financing of not less than a pre-arranged aggregate value, a change of ownership (or sale or liquidation) of the company, or conversion occurring at an agreed date could all be example trigger events. For start-up and early-stage companies, CLNs are a desirable financing source because they let the founder(s) or current shareholder(s) preserve control while rapidly raising money.

For the business, CLNs do have some drawbacks, though. Not the case with equity investments given the essential criteria are satisfied; CLNs are less appealing to investors since they do not qualify for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). Although the negotiation period for CLNs is shorter than that of an equity investment, CLNs are not without complexity and the company—as well as its shareholders—should seek guidance on and grasp the trigger events and conversion price/mechanism.