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Early Stage: Step 11 - Other forms of finance

Editor's note: This is the 11th in a series of articles on developing start-up companies in the technology or biotechnology sectors.

Madison, Wis. - You've started your new company, named it, and perhaps raised some equity funds, perhaps through investors. If you still need additional funding, what other choices do you have? Before discussing this point, there are basic financial principles to consider.

Most of us recognize that we must have some equity to proceed with a business. That is why we invest our own funds and/or raise funds through investors in the first place. Presumably, we have prepared financial projections and forecasts that are necessary to raise the funds from outside investors.

We should analyze the debt-to-equity ratio in our business at the outset and what these financial projections show. It is common to have debt in a business which is three to four times what the equity is. So with that in mind, one can seek debt financing.

There are several possible lenders, including banks, vendors, leasing companies, and other non-traditional lenders. This column will discuss the legal issues of secured transactions.
Remember the first time you bought a car? You probably had to borrow money when you purchased a home. These transactions are secured transactions. You borrow money to purchase the asset.

Simultaneously, you sign a note with the lender, detailing the loan's terms - the amount, the interest rate, and the payment terms.

Defending the code

In addition, you pledge the asset that you acquired to secure the loan. This is called a secured transaction. As indicated, most of us first experience this with a car or home purchase. In our businesses, we can use the same type of transaction. Business lenders, such as banks, are willing to lend business funds secured by the pledge of business assets.

You negotiate the terms of your repayment and pledge a business asset to secure the payment. These transactions are governed by several legal areas. I will discuss two: commercial paper and secured transactions. The Uniform Commercial Code (“UCC”) is a law, which each state has to ensure some consistency from state-to-state on basic business transactions. Article 3 of the UCC (Wisconsin Statute Section 403) deals with banks, financial institutions, and commercial paper. Article 9 of he UCC (Wisconsin Statute Section 409) deals with secured transactions.

As mentioned above, when you borrow money, you sign a promissory note indicating the various terms. Today, most lenders have standard forms which they use. They fill in the blanks. These forms comply with UCC and state legal requirements.

Simultaneously, you pledge the asset that you acquired to secure the loan should your business fail to pay the loan. Again, there are standard forms that comply with the UCC and state law, which most lenders use to document this transaction.

First, your business will sign a security agreement. This document sets forth the essential terms of pledging the asset, including: an asset description; where the asset is located; what your business can and cannot do with the asset; what happens if your business defaults on repayment; and other terms. The security agreement is the contract between the lender and borrower.

Date with DFI

The second step protects the lender from borrowers who wish to defraud them. A document is filed publicly to indicate that the loan is in place. The financing statement is filed with the Wisconsin Department of Financial Institutions indicating that there has been an asset pledged to secure a loan.

This financing statement is generic and intended to notify all third parties that your business has borrowed money and pledged certain asset(s) to secure the loan. It lists the lender/creditor and borrower/debtor as well as the asset(s) pledged. Financing statements can now be filed online.

You can go to and click on “File a UCC Document.” At the next screen, click on “UCC Instant File” and complete the application, which can then be submitted online with a credit card payment of $10. Financing statements expire after five years if they are not renewed.

By the way, you can also check to see what filings have already been made, if any, for your business or others by going to the above website and clicking on “Search UCC Filings.”

Next, I will discuss how the financial institution determines how much to lend and how one can take advantage of it going forward. We will also discuss how these other forms of debt financing are documented.

Previous Early-Stage articles by Joe Boucher

Joe Boucher: Early Stage 10: The nuances of federal laws

Joe Boucher: Early Stage, Step 9: Raising capital in the securities landscape

Early Stage, Step 8: Misclassifying workers brings risk

Joe Boucher and Bonnie Wendorff: Early Stage 7, Part I: Just what is an employee?

Joe Boucher: Early Stage: Step 6 - Taxes, taxes, taxes!

Joe Boucher: Early Stage: Step 5 - Forming the entity

Joe Boucher: Early Stage, Step 4: Cautionary trademark tales

Joe Boucher: Early Stage, Step 3: Naming the entity

Joe Boucher: Early Stage Step 2: Choosing a domain name

Joe Boucher: Starting a tech business? Step 1 is minding the intellectual property

Joseph Boucher is a CPA and an attorney with the Madison law firm Neider & Boucher, with expertise in estate planning and business law, including early-stage business formation. He has a law degree and an MBA from University of Wisconsin-Madison and a bachelor's degree from St. Norbert College.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC.

WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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