For years I have read the popular business magazines, all having so called experts write articles for entrepreneurs on how to finance their business. “The top 10 strategies for financing your start-up”, “How the SBA can help your small business”, “Personal credit is the key for entrepreneurs” and so on. In most cases I’m willing to bet those writing these articles are journalists that have never had a successful start-up. How can I come to that conclusion you may ask? Because of the bad advice they give.

Going to the SBA for a loan, using your retirement funds, tapping all your personal credit cards or giving up 75% of your idea to an investor are all ideas I have read from the popular magazines. The thing is, in every one of these cases you are using your personal credit and not separating you from your business. You are putting 100% of your credit and assets at risk.

I have worked with thousands of small business owners who have been very successful without the need to use their personal credit cards, retirement funds or fill out stacks of paperwork and wait months for a response from SBA backed banks. In fact I have seen entrepreneurs with access to hundreds of thousands of dollars without giving up a percentage of their company or having any of the money show up on a personal credit report. Sounds good right? Well, there is one catch. You will need to go through the evolution of financing your business. You can’t start at the end. This is the problem with most entrepreneurs. They want fast results and aren’t willing to wait. By taking the quick fix they give up ownership and put their personal credit at risk.

The evolution of business financing starts with a solid foundation for your business. A solid foundation is comprised of several parts. The first of which is structuring your business entity appropriately. I recommend to every entrepreneur that you use a Sub Chapter S-Corporation, C-Corporation or Limited Liability Company to operate the business. This is the first step in separating the business owner from the business. The next phase of building the solid foundation is to ensure the business is in compliance with the lending markets. Several business owners are surprised when I tell them most lenders we work with when reviewing a credit application will first call directory assistance to see if your phone number is listed. It’s a simple check, but it’s the first flag that will be raised for them if the business isn’t listed. Why would a lender finance a company that doesn’t want anyone to find them?

There are hundreds of other due diligence phases that a company must go through in order to ensure the owner and business are not considered “high-risk” for obtaining credit and financing. The more a business has in place to show that it is a real business the more likely a lender will grant credit to that company.

The second step in the evolution of small business financing is to define what the business does, what makes it unique and why it will be successful. The business owner must create a one-page “sales pitch” for the business, also referred to as an executive summary. The executive summary can be used when applying for credit, seeking investors and developing marketing campaigns.

Business owners need to keep in mind when seeking financing that the most important thing for a business is to produce a profit. Without revenue there will be no profit. Marketing the business will help produce the revenue and the executive summary will help create the marketing.

Third, a company must build a business credit report separate from the owner’s personal credit. By working with trade credit, the single largest source of lending in the entire world, a small business can tap into limitless leverage for buying goods and services they need to start, run and grow the company. The beautiful thing about trade credit is in many cases it’s free money. If a vendor grants terms of net 30, a business owner has the ability to use the vendors goods or services for 30 days without interest before they need to pay the vendor. The other wonderful part of trade credit is that there are companies offering products and services small business owners need who will report the credit to a business credit bureau. The reporting of the trade line will create a business credit profile separate from the personal credit of the business owner. Eventually the business will be able to access more and more credit under the business name only if it maintains a positive business credit score.

The more credit received under the business name the more likely other companies will grant that business credit. No one wants to be the first in line to grant a business $50,000 in credit, but if others already have they will be more inclined.

Fourth, is to use the owner’s positive personal credit score in combination with a positive business credit score as leverage for obtaining hundreds of thousands of dollars in unsecured lines of credit for the business. The key is to do this with lenders that don’t report the accounts to the personal credit bureaus but rather the business credit bureaus. Many banks offer business lines of credit and loans, however finding the right type of product from these banks can be tricky. A business owner needs to make sure the loan or credit line they apply for reports only to the business bureau.

By keeping business debt separated from the personal credit report, a business owner has the ability to keep their personal credit score high. The more a business owner uses their personal credit in the business, the lower the score will drop. Credit scores determine the ability to buy homes, rates on car insurance, and several other factors. Keeping a personal credit score above 720 is extremely helpful in the business owner’s personal and business life.

The fifth stage of the business financing evolution is to look at other alternative financing the business may be able to obtain. Leasing is one key area. Why use precious cash reserves to buy equipment or software when you can make a small monthly payment? In addition 100% of the payment on the lease is expensed.

The final stage deals with investors. The majority of investors don’t want to look at companies unless they have already progressed through the business evolution stages outlined above. Keep in mind that an investor is not just investing in a business they are investing in the business owner as well. If the business owner has tapped every available resource for credit and cash personally and never taken the time to establish business credit, financing or lease arrangements an investor will toss that company’s proposal in the garbage quickly.

Not every business owner will find themselves at the stage they need an investor. They may have a combination of enough cash-flow, credit and financing in place from the early stages that they won’t need additional capital. However, if a business needs to grow with the help of additional capital or financing there are two typical ways an investor will look at the deal.

The first is through debt financing and the second equity financing. Debt financing with an investor is where they provide a loan to the business in exchange for a pre-determined amount of interest. Equity financing is where an investor puts money into a business in exchange for ownership. There can also be a combination of debt and equity.

The majority of small business owners believe this is where they should start, with the investor. In reality this is the last place a business owner should look. Investors want to use their money to grow a business by having the money spent on revenue generating activities. The typical small business owner that goes to an investor says “I need a million dollars to start my business.” When asked what they’re going to use the money for they say, “start-up costs and payroll”. This is where the investor walks away. No investor wants to fund a project so the business owner can make payroll, buy office furniture, equipment or office supplies.

This is the perfect example of the evolution of business financing. The company starts out as an idea, then structure is put in place. Next, the business becomes real with licenses and a sign outside the building. Next, the business creates an identity with the right message. Then the business obtains trade credit that separates the personal and business credit in order to obtain larger lines of unsecured credit. All of which is used to build the infrastructure of the business without maxing out all the available credit for the business or business owner. Last, the business has the ability to seek investors because it has done everything required to create the solid foundation.

The economic outlook for 2008 remains suspect as the tumultuous conditions afflicting the financial markets have created a turbulent business climate for middle market companies that is likely to continue unabated well into 2009. Commercial banks and Investment banks recently the paragon of the financial services industry have become pariahs in less than a year.

Adversity, however, creates opportunity and indeed many companies have been successful in obtaining financing amid the melt down of the credit markets. Middle market companies looking to grow and needing capital to do so need not panic as banks pull back on financing and credit tightens. Money is still available for companies with solid business prospects – you just need to know where to find it and how to get it.

Mezzanine finance can play an important role in funding the growth of privately owned “middle market” companies in good times and bad. This type of debt financing, however, isn’t really understood by many outside of the industry.

Often called subordinated debt, mezzanine debt is often viewed as quasi equity. As such it is a hybrid of debt and equity financing that is often used to finance acquisitions, product development, plant expansion and new equipment purchases. Company owners also use it to diversify or invest in other opportunities.

Lenders that provide mezzanine financing, for the most part, lend based upon a company’s cash flow rather than a business’ assets. Since there is little or no collateral to support the borrowing, this type of financing is priced significantly higher than secured bank debt. Mezzanine financing is advantageous because it is treated like equity on a company’s balance sheet and may make it easier to obtain standard bank financing. It is also very attractive to a business owner as it reduces the amount of equity dilution, which increases the equity’s expected return.

Mezzanine financing has many of the debt features associated with traditional term debt including interest payments, covenants, and in some cases amortization. But it also has an upside in the form of an equity interest. Mezzanine debt is typically secured by the equity of the company rather than its tangible assets and is subordinated to the debt provided by banks and commercial finance companies.

Mezzanine debt is more expensive than secured debt or senior debt because of the increased credit risk assumed by the subordinated lender. The debt holders receive a higher interest rate than senior debt as well as a quasi-equity stake in the company to compensate for the increased risk. It is a much less expensive source of capital than equity financing; perhaps more important, existing equity holders are subject to significantly less dilution.

On a balance sheet mezzanine debt is found between the senior debt and equity. It is subordinate in priority of payment to senior debt, but senior in preference to common stock if a company is liquidated. It can take the form of convertible debt, senior subordinated debt or debt with warrants.

In the middle market, mezzanine lenders look for a fixed current coupon rate of 11% to 15%, which equates to a spread of 5% to 9% above the prime rate, plus the additional return from the equity stake in the company. This compares to a rate of 1% to 4% above the prime rate for term loans from senior debt lenders.

While most equity investors look for returns of between 30 to 45 percent, mezzanine investors look for annual returns of between 20 and 30 percent. Lenders tend to be flexible in tailoring the structure of the investment to meet the borrower’s operating and cash flow needs, which makes mezzanine debt a useful form of financing.

Most mezzanine loans last from five to seven years with the possibility of early repayment. Unlike bank debt, which usually requires amortization, mezzanine repayments are often not required until maturity. This allows a business owner to reinvest cash flow in growth opportunities rather than paying back senior debt.

Because their return is largely driven by their equity upside, mezzanine lenders are more accommodating during difficult business conditions. While a business owner may lose some independence, he rarely loses outright control of the company or its direction. Owners don’t usually encounter much interference from a mezzanine lender as long as the company continues to grow and prosper. Amounts raised through mezzanine financing can be substantial. A company can leverage its cash flow and obtain senior debt between 2 and 3.5 times cash flow. With mezzanine debt, it can raise total debt to 4 to 5 times cash flow depending on the risk appetite in the debt markets.

Many startup companies believe that they do not need a lawyer to help them with their business dealings. In the early stages, this may be true. However, as time goes on and your company grows, you will find yourself in situations where it is necessary to hire a business lawyer and begin to understand all the many benefits that come with hiring a lawyer for your legal needs.

The most straightforward approach to avoid any future legal issues is to employ a startup lawyer who is well-versed in your state’s company regulations and best practices. In addition, working with an attorney can help you better understand small company law. So, how can a startup lawyer help you in ensuring that your company’s launch runs smoothly?

They Know What’s Best for You

Lawyers that have experience with startups usually have worked in prestigious law firms, and as general counsel for significant corporations.

Their strategy creates more efficient, responsive, and, ultimately, more successful solutions – relies heavily on this high degree of broad legal and commercial knowledge.

They prioritize learning about a clients’ businesses and interests and obtaining the necessary outcomes as quickly as feasible.

Also, they provide an insider’s viewpoint and an intelligent methodology to produce agile, creative solutions for their clients, based on their many years of expertise as attorneys and experience dealing with corporations.

They Contribute to the Increase in the Value of Your Business

Startup attorneys help represent a wide range of entrepreneurs, operating companies, venture capital firms, and financiers in the education, fashion, finance, health care, internet, social media, technology, real estate, and television sectors.

They specialize in mergers and acquisitions as well as working with companies that have newly entered a market. They also can manage real estate, securities offerings, and SEC compliance, technology transactions, financing, employment, entertainment and media, and commercial contracts, among other things.

Focusing on success must include delivering the highest levels of representation in resolving the legal and business difficulties confronting clients now, tomorrow, and in the future, based on an unwavering dedication to the firm’s fundamental principles of quality, responsiveness, and business-centric service.

Wrapping Up

All in all, introducing a startup business can be overwhelming. You’re already charged with a host of responsibilities in which you’re untrained as a business owner. Legal problems are notoriously difficult to solve, and interpreting “legalese” is sometimes required. Experienced business lawyers know these complexities and can help you navigate them to avoid stumbling blocks.

Although many company owners wait until the last minute to deal with legal issues, they would benefit or profit greatly from hiring an experienced startup lawyer even before they begin. Reputable startup lawyers can give essential legal guidance, assist entrepreneurs in avoiding legal hazards, and improve their prospects of becoming a successful company.