by Ben McLane, Esq.
Many struggling artists have the need to record some music or finance a tour, only they lack a necessary element: money. This article will explain different ways to raise capital in order to finance a project.
In this instance, the artist uses his or her own money. On the positive side, the artist will: (1) retain artistic control, (2) be free of financial obligations to a lender, (3) not be bothered with a maze of paperwork, and (4) will reap all of the monetary benefits. On the negative side, the artist will: (1) bear all of the risk, and (2) will have to be solvent enough to finance the project (which is probably not the case).
This involves accepting a loan for a fixed sum of money and agreeing to repay the sum plus interest by a certain date. Loans usually must be paid back whether or not the project makes money. There are two basic loan sources:
Commercial Sources. A commercial source of money would include banks, finance companies and credit cards. In particular, banks generally want to secure a loan with collateral, such as a home, auto or equipment. (If the artist is established, copyrights might be acceptable collateral.) Unfortunately, most artists are not in a position to have collateral in place. However, if an artist has some credit cards and has been paying rent consistently, a bank may loan the artist a small sum. Otherwise, if the artist does not qualify for a loan, the artist can ask a relative or friend with a good credit rating to be a co-signer for the loan. Because the co-signer is agreeing to make the payments if the artist does not, a co-signer is accepting a great responsibility.
Family And Friends. Normally, family and friends will lend money at a lower rate of interest with a more flexible repayment schedule. The downside of this type of loan is that there is a strong potential to strain the relationship if repayment becomes a problem. When obtaining this type of loan, the artist can prepare a simple promissory note. For example: "On or before December 31, 1995, Artist agrees to pay Lender the sum of $2,000.00 plus 8% interest from April 30, 1995, signed, Artist."
Another source of money is investment from a financial backer who can be either active or passive. An active investor will put up money and become involved in the management of the project. This type of arrangement includes a general partnership, joint venture or corporation. A passive investor will put up money but have no role in the management of the project. This type of arrangement is usually a limited partnership, and the artist has to be careful when accepting money from a passive investor because there are security law regulations which may apply. Thus, a professional should be consulted before choosing this latter route.Copyright 1998, Ben McLane
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