Law puts start-up investors to the test

Dear Karen: How many investors can a start-up firm have? I need $800,000. Could I get 1,334 investors to put in $600 each?

Answer: Even if you could, you’d probably run afoul of federal securities laws, said attorney Lori S. Hoberman, co-chair of the corporate and securities group at Fish & Richardson in New York. The Securities and Exchange Commission requires individuals to make investment offerings only to “accredited investors” – people who can demonstrate financial security and sophistication.

You would be unlikely to attract thousands of accredited investors by doing something like placing a newspaper ad, she said. And if you did place such an ad, you would end up violating private offering rules. Public advertisements generally are restricted to public offerings, which are far too costly for a start-up.

“Even if you could find that many accredited investors, it would still be a bad idea,” Hoberman said. After you get more than 500 investors, you are required to register as a “34 Act” company, meaning you’d have to file all the documents a public company would and you’d have to adhere to various compliance rules. “You’re looking for a relatively small amount of money that you could get from an angel funding round,” Hoberman said. “Put together a viable business plan and approach some accredited angel investors.”

Finding clients for a billing firm

Dear Karen: I am starting a medical billing business. How do I find customers?

Answer: Write down the benefits you’ll offer clients that will set you apart from competitors, said Caroline Melberg of Melberg Marketing. Use that list to create a letter that you send to local medical offices. “Highlight your unique selling proposition and offer a guarantee on your services. Follow up with a phone call asking for their business,” Melberg said.

After you land one account, work hard to make that company’s executives happy and then ask them to write you a testimonial that you put on a website explaining who you are and what you do. “Have your site Internet optimized so that it appears in the search engines for keywords that your prospects would likely use to find you online,” Melberg said. “This will result in inquiries from prospects who find you naturally on the Web when they are looking for local medical billing services.”

You can reduce cash-flow woes

Dear Karen: I have trouble managing my company’s cash flow so we stay on the plus side every month. Any suggestions?

Answer: Many small companies fail because of chronic cash-flow problems. When even one or two large customers fall behind in making payments, it can be devastating.

You should offer incentives, such as discounts, to regular customers who pay their bills on time, said Bill Zimmerman of Hartford Financial Services Group. Another idea is to rework your balance sheet to reduce your debt load or refinance your debt at a lower rate so you can lower your monthly payments and free up cash.

If you sell a product, evaluate your inventory “carrying costs,” Zimmerman said, referring to the money you’re spending warehousing, insuring, counting and stocking. “Determine if your inventory can be replaced at lower cost, freeing up more capital” every month, he suggested.

Got a question about running or starting a small enterprise? E-mail it to ke.klein@ latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.