Business Financing-9 Options For Your Small Business
Without the sufficient finances you cannot run your business properly no matter how well planned it is. In other words, business financing plays a huge role in the survival of your business.
Many owners and would-be entrepreneurs face difficulties as to where they can find a source to finance their business. Here is a list of ways that you might want to consider:
1. Partnership
Establish a partnership with company or investors who are willing to put their money in your business. There a two types of partners, the industrial partner and the capital partner. Industrial partners are those who invest their time, skill and effort in the business in exchange for a portion of the income while capital partners invest through contributing cash or property such as machinery to the partnership.
In establishing a partnership, your partner may impose a degree of control over your business besides having a portion of your income so make sure to choose a capital partner who has less demands and conditions and who you are comfortable working with.
2.Investors
Entice investors into your business. Approach possible investors and present a well formed plan that will convince them to invest. This is somewhat similar to partners. The only difference is that investors can only demand minimum control over the business compared to partners although that will depend on the level of investment.
3.Suppliers
Approach suppliers and make propositions. Convince them to give you supplies in a form of loan payable periodically. That way you will have your raw materials without releasing cash before you gain income.
4.Loans
Avail of loans. Inquire from banks and financial institutions for possible business loans. However, not all banks support newly opened businesses. They are more inclined to extend loans to businesses that are already operating. For starting businesses you might want to choose other ways of business financing.
5.Credit Cards
Get cash advances from credit cards. This is normally used for a quick fix of your troubles but this is not advisable for a long term solution because interest rates on credit cards, can be very punitive. Try to get the introductory rates for lower interests.
6.Lease equipment
Lease your equipment. Rather than spending your money to buy new and expensive equipment you might think of leasing them. Leasing generally reduces the amount of money you have to raise. Within the lease period make sure to save enough income to buy your own because leasing is more costly in the long run.
7.Government Help/State Assistance
Avail of government programs. Check with the IDA, FAS and the Department of Enterprise, local county enterprise boards etc. to see what is available.
8.Savings
Utilize your savings. It is time to use your long time savings for greater purpose. You might be a little hesitant but do not worry because if your business will succeed it will come back to you with twice its value.
9.Mortgage
Mortgage your property. Mortgage must be the last resort that you should consider because of the risk it can bring. If you fail to pay you might lose more than what you bargained for.
You can combine any of these nine choices to come up with a best business financing suitable for you and your business.
Mortgages and Charges-Whats the difference?
Mortgages and charges, and the different types of mortgages and charges can be confusing for many small business owners.
There is a significant legal difference between a mortgage of a registered property and an unregistered property (the latter is registered in the registry of deeds, the former is registered In the Land Registry)
The difference in reality is that a registered property is ‘charged’ ie a charge is registered on the property at Land Registry on the property but no formal transfer of ownership takes place.
An unregistered property is actually conveyed, assigned or leased by the borrower to the lending institution subject to the borrower’s right to redeem(pay off) the loan in the property. But title formally passes to the lending institution under the mortgage deed.
The Mortgage Deed
This document states that the lender has made a loan available to the borrower and the borrower guarantees to repay the loan by securing the loan against the property.
The mortgage deed will also contain a number of other covenants as a matter of course including
* A covenant to the effect that the property must be used as the borrower’s principal private residence
* A covenant to not carry out any development on the property without the consent in writing of the lender
* A covenant to insure the property and the interest of the lender noted on the policy.
It is important to bear in mind that these are standard covenants in mortgages with the main banks; it is crucial to read or have a legal professional read the additional covenants if dealing with a sub-prime lender or a smaller financial institution.
Types of Mortgage
1. Principal Sums
This mortgage is for a fixed sum; it is less used in practice now as most banks will issue ‘all sums due’ mortgages.
2. All sums due
There is generally an all sums due clause in most mortgages now and this has a significant impact on a person’s finances if they do not know what it means.
It means essentially that the borrower is pledging their property not just for the property in question but for ALL indebtedness to the bank, now or in the future.(credit card, car loan etc.) This is obviously of huge importance as many people will spread their financial exposure between various banks in an attempt to create a wall between different loans but this clause means the bank can use the house as security for all borrowing.
Foreclosure
This procedure is rare in Ireland and involves the bank taking court proceedings to have the borrower’s interest wiped out and the bank becoming owner. The banks do not want to own houses in Ireland as they invariably attempt to obtain possession to sell the property.
Court order for possession and then sale
This is more common in Ireland and the bank has the power to sell the property without going to court.
However they will be unable to sell without vacant possession so they will go to court to obtain an order for possession.
Receiver
If the property is commercial the bank will appoint a receiver on foot of their mortgage and his duty will be to receive any rents due and pay them towards the mortgage and to manage the property with a view to an ultimate sale.
Commercial Borrowing and Lending-The Legal Position
Commercial borrowing and lending can be a trap for the unwary lender….and borrower.
The issues that arise can lead to borrowers and lenders losing out on what they perceive to be a technicality.
An individual borrower’s powers
An individual can borrow what he pleases and the only issues surrounding this revolve around 3 questions
1. Is the borrower 18 or over?
2. Is the borrower of sound mind?
3. Is the borrower a bankrupt?
For example many small businesses involved families living over pubs or shops.
However the Family Home Protection Act 1976 provides safeguards for the Family Home and if the lender in lending money to a borrower fails to divide out the family home from the business property then the security that the lender thinks it is obtaining may not be effective.
A number of issues which arise from an individual borrowing money arise in the whole area of consumer legislation.
Essentially the Consumer Credit Act, 1995 and the European regulations in 1995 dealing with Unfair terms in Consumer Contracts place fairly onerous obligations on lenders and there is the possibility that if the lending institution gets any of the procedural or substantive safeguards wrong then the security that the bank thinks they are obtaining may not be effective.
Partnership
Unlike a company a partnership does not have a separate legal personality so any issue surrounding the capacity of a partnership to engage in commercial borrowing really falls back on the capacity of the individual partner and this can be ascertained by looking at the partnership deed if there is one (if there is no partnership agreement drawn up then the Partnership Act, 1890 will apply).
Companies
A company is a separate legal entity but is an artificial one to some extent so the ability of the company engage in commercial borrowing depends on
1.The company still being in existence ie not having been struck off
2.Not being in receivership, liquidation or under the protection of the court.
It is interesting to note that if a company adopts the standard Table A articles of association and section 79 has not been excluded from it, then the powers of the directors to borrow on behalf of the company is ineffective.
Section 79 says that a company can only borrow an amount equal to the nominal value of the issued share capital unless the company in a general meeting authorises a higher amount. This can be of enormous significance if the legal team advising the bank overlook this point when granting loans to companies.
Security
A bank will usually take either a fixed charge (on a property) or a floating charge (on stock or debtors or assets that change)
A fixed charge has preference over a floating charge and preferential creditors such as employees and the Revenue Commissioners. But the latter have preference over a floating charge in a wind up situation.
Types of commercial borrowing
Overdraft-normally repayable on demand
Term loan-repayable by negotiated amounts over a period of time
Revolving credit-these are loans which are (were!) popular with property developers allowing for the rolling over of the amount borrowed after 6 months depending on how sales of the development were going.
Factoring-this is essentially the sale of the book debtors of the company to the bank who then gather in the debtors and charge their client a percentage for having provided the finance up front for the book debtors
Leasing-legally the leased property remains the property of the lender although in practical terms the borrower has the use and enjoyment of the asset
Specific Assets in commercial borrowing
Property
This is usually secured by a fixed charge of the property and the company must have the powers in the memorandum and articles of association to mortgage land/property.
Stock
Stock is usually secured by way of a floating charge.
Plant/machinery
Can be secured by both floating and fixed charge depending on the value of the plant.
Debtors/cash
These can be secured by a floating or fixed charge and it has been held in the UK that it is possible for a bank to obtain a charge over the credit balance of a borrower with itself.
Guarantees/Indemnities
When a borrower is involved in commercial borrowing he must be aware of the difference between an indemnity and a guarantee.
A guarantee must be in writing whilst an indemnity need not be. The person giving the indemnity is primarily responsible for the debt whereas with a guarantee the guarantor is secondarily responsible after the borrower who is the first port of call if the loan goes wrong.
A guarantee will normally contain a clause preventing the guarantor from protecting himself by taking security from the borrower. The guarantee will also make provision for the money be repayable on demand which protects the bank from losing out by the running of the Statute of Limitations, 1957 which otherwise might prevent the bank from pursuing the debtor.
As outlined above a company must have the powers to execute a guarantee in it’s memorandum of association.
In a partnership a partner has no implied authority to bind the partnership in commercial borrowing unless it is expressly stated in the partnership deed so the lender will be anxious to get all partners to sign any guarantee.
Post Borrowing
Assuming that a company has the power to borrow and regulation 79 of Table A of the Articles of Association has been excluded then details of the borrowing and charge must be registered with CRO and the Registrar of Companies within 21 days of the creation of the charge.
This time may be extended with an application to court but if the charge becomes void as a result of the charge not being registered within time then the borrowing becomes payable and the lender may sue immediately for recovery of the sum.
Financial assistance re purchase of a company’s own shares
Section 60 of the Companies Act 1963 prohibits the provision of financial assistance for the purchase of shares in the company providing the assistance by anybody. This is to prevent asset stripping and the reduction of the share capital of the company.
However there is a procedure called the ‘whitewash procedure’ which allows certain exemptions which are set out in section 60(2-11).
The effect of this assistance being provided without this procedure is that the transaction is voidable at the choice of the company against any person who knew of the facts which cause the breach.
Conclusion
For many small business owners, the whole area of commercial borrowing is one that now, in 2009, should have been, with hindsight, treated with far more caution. As for the banks attitude to commercial borrowing….unfolding events will show how badly they got it wrong in the whole area of commercial borrowing and lending.
