Financing Your Small Business

Private Debt

A company can raise capital by offering a debt instrument to investors as opposed to an equity instrument. For example, the company could offer secured or unsecured promissory note obligations payable over time at a competitive interest rate. Private company debt, particularly the unsecured variety, is considered risky, and an above-market interest rate is necessary to attract private investors or lenders.

Be sure to check the state usury laws before setting the interest rate.

Many start-up companies offer a convertible promissory note in their early seed rounds. The convertibility feature of the note allows the holder (lender) to convert the amount due for principal and interest to an equity interest in the company. The conversion rate would be the amount at which equity interests in the company will be offered to new investors or at a dis­count to make the investment more attractive. If you use convertible notes or any debt instrument to raise early money, you should organize the entity first and have the note be issued by the entity rather than you personally.