Raising capital is often a positive step for a growing business. It can support recruitment, expansion, product development, and the ability to move faster than competitors.
Most funding deals look attractive at the start. The real challenges often appear later, particularly when the business needs additional capital, refinancing, or wants to bring in a new investor on better terms.
At Johnson and Boon Solicitors, we advise directors and business owners on how to secure funding in a way that supports long term growth while protecting the company’s position and flexibility.
There are many ways to fund a business
Capital funding is not one size fits all. Depending on the stage of the business, the funding requirement, and the commercial objectives, capital can be introduced in different ways, including:
- Director loans
- Private investment
- Angel investment
- Venture capital funding
- Equity investment
- Convertible finance
- Loan notes
Each option has advantages, and each comes with legal and commercial consequences. The right structure depends on what the business is trying to achieve and how much control the company is willing to share.
Why funding structure matters
Funding terms are often agreed quickly, especially when a business is moving at pace or trying to secure investment in a short window.
However, the terms you agree today can shape what your business is able to do in the future. A funding arrangement is not just about access to cash. It is also about control, restrictions, risk and leverage.
Will this funding stop you raising money later?
One of the most common issues we see is businesses taking funding without realising it can limit future options.
Many agreements include restrictions which prevent the company from raising further capital without consent. That can include restrictions on taking new investment, borrowing from alternative sources, refinancing, or issuing new shares.
This becomes a serious problem when a business later needs to raise funds quickly. If the company is required to obtain approval from a lender or investor first, it may lose momentum and negotiating power at the point it needs it most.
The aim is not to avoid funding. The aim is to structure it properly, so it supports growth without limiting future opportunities.
What security is the funder asking for?
Businesses should be cautious about the type of security an external funder may request.
Funding is often linked to security such as:
- Formal charges over company assets
- Fixed charges
- Floating charges
- Debentures
- Personal guarantees in some situations
Security arrangements can have long term consequences. They may restrict how the company uses its assets, limit future borrowing, and create complications if the business later needs to restructure, sell, or take on further investment.
Before agreeing to security, it is important to understand what is being secured, what triggers enforcement, and what practical control the funder may gain.
Loan notes and convertible finance
Loan notes and convertible funding arrangements are widely used, particularly where a company wants to raise funds without setting a full valuation immediately.
These structures can work well, but they must be reviewed carefully. It is important to understand how repayment or conversion works, what happens if milestones are missed, and what rights a funder gains if the business does not perform as expected.
Key terms to look out for before you sign
Before agreeing to funding terms, it is sensible to check whether the documents include:
- Restrictions on raising further finance without consent
- Security over assets through a debenture or charges
- Default provisions triggered by technical breaches
- Investor rights that affect control over key decisions
- Repayment terms that place pressure on cashflow
These issues can often be negotiated, but they need to be identified early. Once funding documents are signed, the company’s flexibility can be reduced significantly.
Keeping directors protected throughout the process
Directors are expected to make decisions that are in the best interests of the company. The Companies Act 2006 imposes statutory duties on directors, including:
- Section 171, duty to act within powers
- Section 172, duty to promote the success of the company
- Section 174, duty to exercise reasonable care, skill and diligence
- Section 175, duty to avoid conflicts of interest
Funding arrangements are legal agreements that can shape the future of the business. It is important that directors understand both the commercial risks and the legal consequences before entering into them.
How Johnson and Boon Solicitors can help
We support businesses at all stages of growth and investment, including advising on:
- Structuring investment and capital raising
- Reviewing heads of terms, investor documents and loan note instruments
- Advising on restrictions linked to future funding and refinancing
- Reviewing debentures and security documents, including charges over company assets
- Negotiating protections for the company and its directors
Supporting future funding rounds, shareholder agreements and governance
Speak to a solicitor
If you are considering raising capital, restructuring funding, or taking investment into your business, early legal advice can help you secure better terms and avoid difficulties later. Johnson and Boon Solicitors can review funding documents quickly, explain the restrictions and risks in plain English, and ensure your funding arrangements are commercially sound and legally robust. If you would like to speak to our team, contact us today.