The legal process for receiving funding

This guide describes the process you need to go through to receive funding after your application has been accepted.

What happens next?

Your application has been accepted, what happens next?

After sending in your funding application, you may hear that an investor has agreed in principle to invest in your business.

This means your application has been accepted based on the information you've given, but your lender will be doing further checks.

This guide covers the next steps you need to take.

At this stage you and your lender will need to get in touch with your lawyers about adding the agreed terms of investment into the appropriate legal documents.

It is not unusual for companies to pay their lenders’ due diligence and legal costs.

It's likely that your business will be responsible for professional fees, such as legal costs, unless you have agreed different terms.

The process of receiving funding

This process is modelled on how you would receive equity investment, but it also applies to the process of receiving debt financing from non-bank lenders.

Term sheet

You will have used a term sheet while you were negotiating with your lender/investor.

The final version of the term sheet will have the following information:

  • The amount of investment you will receive
  • The valuation of your company
  • Equity stake that your lender will receive
  • Any other disclosures or warranties you need to give to the investor

The term sheet will also give you information about when you will receive the money from your investor. This might be a schedule of multiple payments.

Shareholders’ agreement

This document covers the terms of your investment and sets out the relationship between your business and your shareholders after the investment has been made.

If the shareholders are to gain rights, such as electing directors, this will be explained in this document.

Disclosure letter

Other than term sheet and the shareholders' agreement the company's warrantors will give warranties to the lender about the state of your business.

As the founder of the business, you would be the warrantor. This means you would give assurance that the facts you have given are true.

If you have a technology intensive company, your warranties could also cover your business’ intellectual property (IP). This will cover the uniqueness and protectability of any IP.

You can give more information about any of the warranties by using a disclosure letter.

Once you've sent this letter to your investors, they need to let you know if they change their minds about investing in your company.

If you do not give information that contradicts the warranties, your investors will not be able to claim for any losses they take on because of their investment.

Articles of association

The articles of association are documents that describes the purpose of your company with the duties and responsibilities of its members.

Depending on the nature of what you have agreed with your investors, you may need to have new articles of association.

The new documents will need to deal with any new issues that affect shares and their associated rights, such as dividends. Your investors will want contractual rights to prevent shareholders or management taking key decisions without their consent, even if they only hold a minority stake in your company.

Your lawyers should be involved in creating these documents to ensure your business’ interests are being properly represented at all stages of the investment process.

Got a question about accessing finance?

Get in touch with our team of experienced financial readiness experts who can help you secure funding from a range of sources including bank funding, equity funding, and grants.

Disclaimer

This guide was written by our investment team at the Scottish Investment Bank who work with Scottish businesses and UK and international investors.