When setting up a company, or any small business, it is almost always the case that financial support is required for investment in the infrastructure, employees, advertising, property or any other initial start-up costs.

Most newly incorporated companies make losses initially, whether that is because of these start-up costs or because of the investment cost of promoting and marketing the company’s business. Conventionally, such initial capital investment (and working capital investment required to cover initial cash flow to manage running costs) is funded by the initial share capital acquired by shareholders (who, for most small companies, will also appoint themselves as directors).

The start-up phase of a business is perhaps the most important part in determining whether the company is going to be successful. A strong shareholders agreement is always recommended to ensure all owner-managers have comprehensive plans as to the agreed structure of the company, the objectives of the business and the ultimate aims (for example plans for the exit by shareholders after a period of time).

Without an agreement as to how the company will be run, with time the business expectations of each individual owner will almost certainly diverge leading to a dispute between shareholders.

Additionally, and aware of the limited liability status of a company, a majority of lenders will seek an alternate form of security to protect themselves against the business failing of falling into insolvency.

Bank lending

Traditionally, lending for a business venture was commonly undertaken by consulting your bank manager or, as is common nowadays, the relationship manager at your bank. This continues through to today and the commercial lending arm of most banks is a common source for the funding of a majority of companies.

However, this traditional form of bank lending can be expensive, is not appropriate for all types of business, may not be as flexible as required and may limit a company’s growth or put unwanted personal burdens on the company’s directors.

Asset based lending

Asset-based lending has been around for a number of years but, in summary, it enables a company to obtain funding on the basis of its assets forming security for such lending.

  • for companies, the most important area is perhaps the need for cash flow funding;
  • some companies may be very solvent on paper, but issues such as late payments of their invoices (when simultaneously creditors are pressing for payment) can destroy an otherwise healthy profitable company;
  • in these circumstances it may be appropriate to seek funding from funders who offer to immediately pay a large part of your invoice raised, thus avoiding the cash flow problems faced where customers are taking a long time to pay.

At Francis Wilks & Jones we advise on such arrangements and can assist with any demands you may have for such a financing arrangement. The type of lender, and other commercial considerations, all need to be seriously considered before entering into such an arrangement.

Fintech, crowdfunding and alternatives

There are a number of alternatives to standard bank lending which have arisen in recent years.

Financial technologies, or Fintech, have evolved to provide bespoke and flexible finance mechanisms which many companies are increasingly using in accordance with their business needs.

Crowdfunding is an alternate method of funding new business start-ups, where the financier itself is not the source of finance but instead acts as a go-between to broker an arrangement where a company seeks finance from a number of investors, with the advantage that the risk is thinly spread across those investors. The investors also have alternate means of return on their investment.

The advantage of these alternate funding mechanisms is that very small micro companies based on a solid business philosophy can be easily set-up and positioned for growth without the historic lending demands of a complex business case (which is rarely realistic) or comprehensive evidence of credit-worthiness. Today business growth is positively encouraged, and the flexibility of these alternate finance arrangements have increased the opportunities available to such companies (and therefore the wider economy)

Equity funding

Equity funding remains one of the biggest source of company investment, whether that be upon start-up or during the life of a company.

In simple terms, a company raises funds through the issue of shares for a nominated value – either the nominal par value (perhaps £1 or even 1p per share) or a higher premium value (usually ascribed to shares where they are sought to be listed on a public exchange or privately with dedicated investors).

  • the benefit of investing in a company’s shares is that the investor retains a % interest in the company;
  • if it is successful and grows then the value of that company will normally grow exponentially relative to its profitability (although profit does not always drive the valuation).
  • as opposed to traditional lending, the return on investment can be significantly higher.

However, equity funding presents risk. The risk that the company is not successful and the risk of losing all of the monies invested is greater, as in an insolvency scenario the shareholders are the last to see any return (and indeed it is extremely rare for any return being paid to shareholders where the company is placed into administration or liquidation).

Security

A lot of financiers, particularly where the amount advanced is, or could potentially be, large will seek security over the assets of the company via a debenture or charge (which must also be registered against the company at Companies House.

The advantage from a lender’s point of view is that they have security against assets and so, if the company faces trading difficulties and/or is placed into insolvency, then that creditor will have priority to a recovery of the company’s assets to repay the debt owed.

Personal guarantees

A personal guarantee is a contract where a third party (usually a director) agrees to personally guarantee the debts of another party (usually the company). Because it is personal, this means that the company’s debts will often attach to the personal assets owned by the director upon the company failing to pay the sums guaranteed.
However, there are legal requirements that must be followed for a lender to properly be protected by a personal guarantee, and further to properly trigger the liability owed under the personal guarantee.


If you require more assistance with understanding your company’s finance options or any personal guarantee you are about to sign or which is being enforced against you, then at Francis Wilks & Jones you will always speak to someone at a senior level who will respond to any query you have very quickly. Please call any member of our team for your consultation today and we will be delighted to help. Alternatively email us with your enquiry and we will call you back at a time convenient to you.

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