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Business Finance and the Non-Disclosure Agreement

Importance of Sufficient Business Capital

Many businesses, whether they have been in operation for several years or are just getting started, require financing from time to time for a variety of different reasons. Business financing has always been a key element that can determine the success or failure of many different types of businesses. It's not uncommon for a well planned and expertly run company to fail because they underestimated the need for obtaining capital to fund the operation long enough to become profitable.

Regardless of the knowledge of the individual starting the business or how unique the business concept is, there will be a point where funding the venture becomes critical. Some individuals have the ability to finance their own enterprise or they already have access to private funding, but for the majority of businesses, when the need arises to obtain operating capital, there are certain things that need to be taken into consideration.

Importance of a Non-Disclosure Agreement

There are several different reasons for companies to seek an infusion of operating or venture capital, and how they go about obtaining the financing is just as important as acquiring it. Many times, a company will be required to disclose sensitive information about their business plans to the lender or investor in order to obtain a loan. It is important for a company in this position to utilize a non-disclosure agreement prior to discussing the details of their plans.

The non-disclosure agreement helps to prevent intentional or even accidental disclosure of the information related to the attempt to obtain financing.

Protect Sensitive Information

A non-disclosure agreement will help to ensure that all parties involved in the negotiations are aware that any leak of sensitive information could be detrimental to the company seeking the loan.

This could result in a competitor seizing the opportunity, which would have a disastrous result for the company as well as the entity that just invested in it.

Business Survival Comes First

Business startups usually require operating capital to get started and succeed. There are a number of large initial expenses as well as ongoing financial burdens a new business faces that can quickly drain their operating capital. For these types of situations, obtaining financing is the most crucial aspect of business survival.

At the early stages of a business, many investment firms or traditional lenders might be reluctant to sign a non-disclosure agreement because they are approached nearly every day by a company that has a brilliant new idea or a great business plan that is somewhat similar to the ideas and plans they reviewed the week prior. It might not be in the investors' best interest to sign a non-disclosure agreement that might place them in a position of liability, so many times they won't. In this case, the vital thing is for the startup to obtain the capital regardless of the risks of possible disclosure.

Proven Companies Have the Edge over Startups

For companies that have a proven track record of success, the acquisition of capital can be an easier prospect than for a startup. For proven companies that are in need of an infusion of operating or venture capital to expand their operation or take advantage of a lucrative opportunity that has suddenly presented itself, the need to maintain secrecy during the finance negotiations can be critical to the success of the venture. In this situation, investors or lending institutions are much more disposed to sign a non-disclosure agreement because it involves the infusion of capital into a proven company, not a startup enterprise that may or may not be in business within a year.

Financing entities understand that securing the flow of information regarding a critical business deal is the key to a company being able to take full advantage of an opportunity. If the sensitive information regarding a company's expansion or market acquisition were to be compromised, it could damage the opportunity and do harm to all the parties involved. In this case it is always in a company’s best interest to insist on a signed non-disclosure agreement prior to revealing any sensitive information to a potential lender.

Critical Role of a Non-Disclosure Agreement despite Difficulty in Obtaining One

Even though it might be more difficult for a new business to convince a lending institution or investor to sign a non-disclosure agreement, it is still in their best interest to attempt it. Sometimes it is merely the presentation of a non-disclosure agreement that signals to the investor that the startup company is savvy enough and confident enough in their idea to merit funding.

For established businesses that are seeking capital to expand or target an opportunity, it is critical to ensure a non-disclosure agreement is signed by all parties involved to prevent any leakage of information about the business venture. In most cases, a lending institution or investor will understand the sensitivity of the arrangement and sign the document. In either case, the manner in which the funding is acquired can be just as important as actually obtaining it.

How to Create a Non-Disclosure Agreement

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