Appropriate business funding is critical to the successful trading of any company or business. Our team regularly advises business owners and directors on their funding requirements, facility documentation or conditions requested by a financier. Call our friendly team today for help.
As a business owner or director, it is important that you obtain clear, practical and commercial advice on the different types of finance available and the security documentation required.
This is hugely important when considering entering into a finance facility, both for your fiduciary obligations to your business and its shareholders but also if you are required to provide any form of personal security such as a guarantee, indemnity or warranty.
Our highly experienced team of commercial finance solicitors specialises in the following:
Alternative finance is a broad term intended to include almost any source of business funding other than the traditional bank loan or overdraft. It is a rapidly developing area of finance that is characterised by its creativity, dynamism and responsiveness to customer needs.
Within the scope of alternative finance can found crowdfunding, peer-to-peer lending, micro loans, financial services lending, equity finance and angel investments. More established alternative finance products include asset based lending. Each of these alternative finance sources have their own unique characteristics, so it is important the that business owners understand how each of these products work before entering into any agreement.
Alternative finance business funding sources are particularly attractive to start up and young SMEs because their lending criteria can be less strict than the traditional banks and can offer more flexible finance arrangements.
Asset based lending
Maintaining operating cash flow is a major challenge for SMEs and if not achieved can, unfortunately, lead to business failure for many SMEs.
Asset based lending (ABL) is a method of providing business funding against the composite value of some or all of the various assets in a business, including fluctuating assets such as debtors (invoice or receivables finance) and stock (or inventory) as well as more traditional assets such as plant and machinery and property. It is a form of business funding particularly suited to generating additional working capital, often at a higher level than bank lending and with greater flexibility to support the growth of an SME, but it can also be used to finance investments such as management buy-outs (MBO) or management buy-ins (MBI) or mergers and acquisitions.
This type of business funding is attractive to SMEs who do not have strong credit scores (because they are first time borrowers or have existing debt) do not have established strong relationships with banks, do not have long trading histories or do not have the types of assets banks like to take security over.
The operation and documentation of asset based lending is substantially different to that of bank lending, so having the correct advice before entering into these types of facilities is essential to avoid damaging misunderstandings later is essential. FWJ is a market leader in the asset based lending sector and its team of commercial lawyers is very experienced in providing clear, commercial advice on this type of business funding.
Secured and unsecured lending
Secured and unsecured lending is important for any business owner to understand.
Perhaps the most obvious source of business funding is a bank loan; either a lump sum repayable over a fixed term to provide for major capital expenditure, or a revolving loan or overdraft to provide resources to meet more regular business expenses. Loans can also be obtained from specialist lending institutions such as bringing lenders. All loans will bear interest on the outstanding balances as well as incur fees in connection with use; these costs can quickly accumulate and change the overall debt significantly, so it is important that these terms are properly understood at the outset.
Generally traditional bank lending requires security, (such as mortgages or charges)for the loan over all the assets of the company, together with personal guarantees from the directors.
A SME may be able to raise loans on unsecured terms from personal connections of the directors or by the directors and shareholders themselves lending money to the business. With the distressing rates of small business failures at the moment, this type of business funding is highly risky for a lender, and loans on such terms are more likely to be made for personal than commercial reasons.
Getting or giving security
Collateral or security for the repayment of debt is a crucial feature of business funding. Where a financier requires security it is usually impossible for the SME to proceed without agreeing to these terms.
Whilst the purpose of getting security for the business funding provider is to reduce the risk to it of not being able to recover the monies it has paid to the SME, there is also a risk for the business itself. If the business is unable to pay any part of the loan or debt when due, or it commits a breach of any term of the business funding facility, the security holder will have the right to take the secured assets away from the SME.
A specific property or chattel (an asset such as plant or machinery) mortgage or charge could, if enforced, deprive the SME of the crucial asset it needs to continue its business. A debenture or all asset security will attach to everything owned and used by the business, both tangible and intangible assets, with the same crippling consequences.
On the other hand, an SME that does not have the type of assets typically attractive as security can struggle to obtain some types of business funding and will need to explore other options
Selling some of the shares (a stake in the “equity”) of a business to a specialist equity financier can generate the cash injection it needs to develop and grow.
Venture capitalists provide funding to a SME in return for a stake in the business, through ownership of some of its shares. The extent of the venture capitalist’s interest in the business will vary on the amount and terms of the investment and could result in the control of the business being taken away from the creative entrepreneur who started the business. However, these investors are often experienced and well- connected in the commercial world and, in addition to essential funding, can provide key support to a developing business. As venture capitalists expect to recover the value of their investment from the profitability of the business, it is in their interests to ensure the business succeeds. The business owner will need to understand and be able to prepare for the venture capitalists exit strategy.
Trade finance (or import finance/ export finance) is a specific form of business funding that is available to companies importing and exporting goods overseas.
Trade finance specialists offer an alternative to, the often more expensive, import loans, credit cards or overdrafts. The term trade finance incorporates a number of different products, such as stand-alone facilities like purchase order finance, letters of credit or bonds and guarantees or rolling facilities like structured commodity finance or supply chain finance or an ABL product such as invoice finance or stock finance.
Trade finance can assist a business in the purchase of goods from overseas by bridging the gap between paying suppliers and being paid by customer, thereby improving cash flow. Apart from the cash flow benefits, this type of business funding can help a SME preserve capital and can even improve its competitiveness: by enabling a business to obtain better terms from suppliers, for example by providing sufficient funds to offer payment in full up-front or to cover duty, VAT and freight costs as well as the cost of the goods.
Similarly to asset based lending, the amount of business funding available to a SME via trade finance focuses more on the strength, reliability and value of the underlying trade than the balance sheet of the SME itself. It is therefore well suited to developing or asset-light business.
As a firm we have successfully dealt with numerous financial transactions and advised many businesses in respect of their borrowing needs and in respect of all manner and size of finance facility. Whatever your enquiry, please contact us, our team of lawyers is here to help you.