Top Consideration to Make When Securing Financing for a New or Growing Business

Whether you are a current small business owner or an aspiring one, business financing is an important topic. Without financing, businesses often cannot expand rapidly or even get off the ground in the first place. As the saying goes, it takes money to make money. In this post, we survey the five most common sources of business financing and discuss the most important practical and legal considerations business leaders should make when pursuing each.

Family and Friends

One of the most common sources of financing for small businesses is family and friends. Very small or even new businesses may find that seeking help from neighbors and loved ones is both easy and preferable to other financing options. Although it can be awkward to ask others for help, you might be surprised at who in your network may be willing to help you succeed. Often, friends and family financing involves written promissory notes, gifts, or even small investment in exchange for a stake of the company. Usually, friends and family will be willing to provide you financing in a way that won’t overburden your fledgling company.

Depending on the friendly financier, interest rates and other loan terms (if a promissory note is involved) can be extremely favorable. Such may be the case when wealthy friends or family members are willing to help you start or grow your business. However, one of the greatest risks of friends and family financing is that it can dramatically change the nature of your relationship and even lead to conflict. Thus, despite the financial and legal advantages this source may offer, it should be pursued with caution.

Bank Loans

When friends or family are not available, most entrepreneurs turn to their local bank for a loan. Bank loans are the most common sources of funding for small businesses. Typically, bank loans involve moderate interest rates and short repayment times. Because many small businesses fail, these terms seek to offset the bank’s lending risk. In addition, banks usually require that small business owners chip in a significant portion of start-up or project costs; banks often will not lend 100% of financing needs.

In addition to these characteristics, bank loans usually involve additional legal considerations. For example, most banks will require that the loan be guaranteed by the business’s owners. This means that if the small business fails to pay back the loan, the owners are still on the hook—even if the small business goes bankrupt. Also, banks often require the small business to put up collateral for the loan, as a form of security in case the small business defaults on payments. In the case of default, the bank can then repossess the collateral-property. Depending on the business and amount involved, a bank may seek a security interest in only a few pieces of property to all the assets of the business. Thus a bank may not be as easy of a process as a friend or family, but obviously it is the most traditional and structured process. Although a bank loan may be a little intimidating, a borrower knows that the bank will be a solid institution to approach and receive structured guidance from and perhaps more formality will help make the business you are seeking funding for act more “business” like.

Government Grants and Loans

Some small businesses may find that they qualify for government loans. These sources of financing are essentially bank loans, but without high interest rates, short repayment times, and security interests—sometimes even without personal guarantees. Government loan programs secure favorable loan terms by guaranteeing the loan themselves. Thus, instead of the owners making a personal guarantee, the government makes one instead. Many small businesses will likely find that they qualify for some amount of government loans through the Small Business Association.

The state and federal government also offer grants to small businesses. These grants are usually targeted at increasing opportunity to minorities or encouraging the creation of new businesses in needed industries and in rural areas. In many cases, the grant money is provided at no cost, and without any obligation to repay. However, these grants usually are for smaller sums unlikely to fully cover all financing needs. Therefore, government grants are a good supplement for other sources of funding. You can review available grants at and


The newest form of business financing is crowdfunding, which entails seeking a large amount of funds from many people who individually contribute small amounts. As crowdfunding has increased in popularity, it has expanded at the state and federal level and can now finance projects involving only a few thousand to millions of dollars. However, different crowdfunding paths involve very different legal considerations.

The most popular fundraising usually takes place online at websites such as There, anyone (including small businesses) can create a fundraiser. These sites often require that the fundraising be for singular projects, such as the creation of a new product or the building of a new facility. Those who pledge money to the fundraiser are often entitled to some kind of benefit depending on the project. But most importantly, no one who contributes money receives any kind of ownership interest in the company. If you have a compelling project that many people would be excited about, online crowdfunding might be a good first shot at financing.

For those seeking to raise hundreds of thousands to millions of dollars, other crowdfunding programs exist. New in Minnesota this year is MNvest, a program that allows small businesses to crowdfund up to $2 million. Unlike online crowdfunding, though, contributors are investors and own a stake in the company. On the federal level, the JOBS Act allows for crowdfunding through the Securities and Exchange Commission. This crowdfunding is similar to MNvest, but allows small businesses to seek investment from residents of all states and up to $5 million. Small businesses interested in crowdfunding should carefully consider the reporting and regulatory requirements of raising capital in this way, as these may be difficult to comply with and costly.

Equity Financing – Angels and Venture Capital

Lastly, small businesses looking to grow rapidly and needing millions of dollars of funding may turn to “angel” and venture capital investors. These kinds of investors pool large sums of money and invest in multiple start-ups and small businesses at a time and can offer significant financing. Note, however, that this kind of financing is equity financing, which means that the investors gain a stake in the company. And when it comes to angels and venture capital, the stake required is often substantial.

When angels and venture capital firms invest in companies, they usually require certain concessions from the original business owners. In addition to receiving a large stake of ownership, they may require preferred shares that give them dividend and liquidity preference above other owners. In addition, they may seek the ability to select directors for the board of directors and to take an active role in oversight and even management of the business. Some may obligate the main entrepreneurs to stay with the company for a specified period of time so as to reduce risk that the entrepreneurs will leave for other opportunities. While these concessions may seem like a lot to give up, angels and venture capitalists can bring important people and connections to a business (in addition to much-needed financing). Such benefits may be absolutely vital for a company to take off in a short amount of time. Thus, choosing an angel or venture capital investor is extremely important and usually involves significant searching and negotiation.

If you plan to be involved in business financing, you should work with an attorney to help guide you and advise you on associated legal risks. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.




What the New Federal Defense of Trade Secrets Act Means for Minnesota Businesses

If you’re a businessperson, chances are you come into contact with trade secrets every day. Trade secrets are, generally speaking, any piece of information that derives value from not being known to or readily ascertainable by other persons who can use them and which are protected from disclosure by reasonable efforts. Trade secrets are anything from specific customer lists to algorithms for computer systems. And even unpatented inventions are often trade secrets.

Trade secret protections are protected primarily by state law, but recently Congress passed the Defend Trade Secrets Act (DTSA), which adds some federal protections. For most small-to-medium businesses, the DTSA will not have much of an impact; the DTSA only provides additional protections for trade secrets that are exchanged over state lines and supplements state trade secret protections. But for Minnesota companies that share trade secrets and other confidential information with other businesses and persons outside of the state, the DTSA provides additional protections, but imposes some additional requirements.

Immunity Provisions in NDAs

One such additional requirement is the need for parties to provide notice of certain disclosures that are immune from liability under the DTSA. When companies share trade secrets with each other (usually in collaborative arrangements), they often sign confidentiality or non-disclosure agreements (usually referred to as NDAs). Many NDAs contain clauses that require that the parties not disclose any confidential or trade secret information under any circumstances. Under most state laws, this provision is completely valid and has no effect on the remedies available to disclosing parties in the event their confidential information or trade secrets are disclosed to the public by unscrupulous recipients. However, the DTSA limits the effectiveness of these clauses in federal trade secret cases.

Under the DTSA, in order for a trade secret owner to obtain exemplary (punitive) damages or attorney’s fees (essentially reimbursement for the legal costs of suing to protect the trade secrets), all NDAs must contain certain notices of immunity. The DTSA provides immunity for disclosing trade secrets to any person who discloses trade secrets “in confidence” to a federal, state, or local government official, “either directly or indirectly to an attorney . . . for the purpose of reporting or investigating a suspected violation of law” or in a “lawsuit or other proceeding,” so long as the filing is “under seal.” In effect, this immunity provision overrides the “no disclosure whatsoever” approach to NDAs. It further requires that parties must provide notice of this immunity in their NDAs. If the notice is not given, exemplary damages and attorney’s fees are not available to anyone seeking to protect their trade secrets or receive compensation for misappropriation. Since these remedies can be fairly substantial, it is in a business’s best interest not to foreclose the possibility of receiving these remedies.

Effective Date

As stated above, the DTSA does not override or change state trade secret law, so most small businesses are unaffected by the immunity and notice provisions. For larger businesses, however, it makes good proactive sense to begin including an appropriate notice of immunity clause in NDAs. Since the effective date of the law is May 11, 2016, any NDAs entered into after that date should include this language. NDAs entered into before this date need not include a notice of immunity provision.

If you plan to be involved in any sharing of confidential information or trade secrets, you should work with an attorney to draft NDAs in accordance your specific needs and goals and the applicable law. This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.