Private Debt Funding Via Reg D
In addition to raising equity capital from investors - a substantial number of private companies use the Regulation D Programs to raise private debt financing. Most early stage or start-up companies do not have the capability to qualify for traditional bank financing due to strict underwriting criteria. Thus, many entrepreneurs seek debt financing from private investors to capitalize their opportunity.
Raising debt financing from private investors using only a business plan is nearly impossible. Business plans do not provide any capability for accommodating multiple smaller investors for the total funding needed.
The result? Most entrepreneurs are typically forced to try and locate one extremely wealthy investor with the total amount of capital needed. This severely limits your capability to raise funding - and drastically reduces the number of potential investors available to help capitalize your transaction.
There are several "core fundamentals" needed to raise private debt financing from investors. For example:
Private Placement Memorandum that provides critical details about the debt offering. Business plans do not provide information about the technical structure of an offering. The structure of an offering allows you to raise debt financing from a number of investors instead of trying to find one with the entire amount of capital you require. The PPM sets forth critical information such as: the purchase price per note, how many notes are being sold to investors, maturity date, rate of return, etc. These are crucial items that must be presented to a potential investor in proper form or they will not invest.
A Subscription Agreement for purchasing the notes. Don't expect investors to give you capital based on a handshake. Would you invest funds into a company without signing a document that sets forth the terms and conditions of the loan? The Subscription Agreement sets forth these terms and conditions - this is the document the investor signs and gives you with their investment check. You will have a very hard time raising debt capital without this basic document.
- Another example would be the Promissory Note Agreement - the note is the actual loan agreement between the investor and the company. You can't have a business loan without a loan agreement.
A Regulation D Debt Offering functions much like a private business loan where the company sells a promissory note to investors. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. Thus a note would provide a certain interest rate typically paid annually to investors with a maturity date that dictates when the principal is paid back in full.
The notes are sold in fractional amounts providing flexibility for accommodating investors. For example - a typical debt offering where the company was raising $100,000 would involve the sale of 20 notes at $5,000 per note. An investor investing $5,000 would get one note, a $10,000 investment would purchase two notes, etc. The notes pay an annual interest rate (which can be set by the company) that provides for the return to the investor. The "maturity date" for the notes dictates when the company would pay back the original invested capital to the investor.
Many early stage companies that lack the required equity or operating history for conventional bank financing will use private debt from investors for a short period of time (12-36 months) to establish a credit and operating history. They then have the capability to take out the private debt loan from the investors with a standard bank business loan at a lower interest rate.
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