Asset/Equity Finance
What steps do I need to take to introduce an investor to my business?
In the case of equity finance some of the issues that may need to be addressed are:
- type of shares to be issued and any special rights attached to them
- share capital
- amendment of articles of association
- put in place shareholders’ agreement
Invoice discounting/factoring
I have been having some cash flow problems with my business and think this may be the solution, what are the legal issues?
Normally this involves a business transferring its debts to a bank or finance company in exchange for early payment (typically 65% to 80% of the invoice amount). A charge equivalent to interest is applied for the period between the date of payment to the business and the date of collection from the debtor.
Typical issues which arise:-
- are the debtors notified of the transfer from the start and does the financier or the business organise collection?
- Is the finance with or without recourse ie. does the business or the financier bear the risk of bad debts? More usually this is the responsibility of the business.
Directors Personal Guarantees
I am trying to extend the overdraft limit on the business account and have been asked to give a personal guarantee, why?
Companies have limited liability. If a company becomes insolvent whilst owing money the creditors will lose out. Banks often ask directors to give personal guarantees so that the Director would be liable to pay the bank’s debt out of his/her own pocket. Beware when being asked to sign a personal guarantee, they invariably contain onerous terms which you should fully understand before signing.
I have been told I need to obtain independent legal advice before signing a directors’ personal guarantee, why can’t I just sign this?
Due to the very onerous nature of personal guarantees a Bank will insist that independent legal advice is taken. Many of our clients are surprised when we explain to them exactly what the clauses within a guarantee mean.
In any case you need to consider your position not just as regards the bank but in relation to shareholdings etc to ensure you are not taking a disproportionate risk as against other interested parties.
