Reviewed: 6th June 2018
With traditional lenders such as high street banks still reluctant to lend to small businesses, particularly those that are just starting up, directors increasingly have to fund their company through alternative channels. For some this means obtaining finance through invoice financing, hire purchase, or even looking towards more niche options such as crowdfunding.
However, for many directors this means finding themselves putting their own money into their companies to assist with cash flow, the purchase of stock and business assets, or to fund a growth and expansion project. In many cases this is done on an unsecured basis, meaning directors simply advance this money to their company without going through a process to secure this loan to an available asset or class of asset. This can become a serious problem should the company find itself insolvent and faced with the prospect of liquidation in the future.
By providing an unsecured loan to the business, you will rank pretty low down in terms of priority when it comes to receiving money as part of the liquidation process. So much so that your chances of recovering any of the loan amount is extremely slim. Depending on your personal financial position and the scale of the loan, this could cause serious issues for you. However, if you advance the loan on a secured basis, you put yourself in a much better position should the company’s fortunes take a turn for the worse. As a secured creditor you will shoot up the pecking order when it comes to the company’s liabilities being repaid as part of the liquidation.
A loan can only be secured on an appropriate asset which is free and clear from finance. For example, if the money is being used to purchase a piece of machinery for the company, you could secure your loan on this, but not against a vehicle which is currently being paid for via a finance agreement. A loan would be secured by filing what is known as a debenture.
A debenture is essentially a formal agreement which is put in writing and signed by both the lender and borrower, which sets out the precise terms of the loan agreement including stating which asset the loan is being secured against, the interest charged, and the proposed duration of the loan. In order for the debenture to be enforceable, it must be filed at Companies House.
Should the debenture be drawn up but not submitted to Companies House, the document has no legal standing and in the event of liquidation, the insolvency practitioner overseeing the case is within their right to ignore the charge. Once filed, a debenture typically covers “all monies” advanced by that lender. This means that not only is the current loan secured, but any future loans or money which has been advanced in the past will also fall under this agreement.
By attaching a floating charge to the debenture, this means that should your company enter a formal insolvency procedure your chances of being paid back at least some of the loan are greatly improved. This is because in insolvency proceedings, secured creditors rank above those who lend on an unsecured basis such as suppliers and customers.
Assets secured with a floating charges can be used, moved, and sold by the company during its usual business operations; however, should the company enter a formal insolvency procedure the charge will ‘crystallise’ and the asset must be left alone to be dealt with by the insolvency practitioner. It will usually be the case that the assets will be sold and the proceeds will be used to repay the company’s creditors.
If you have any questions regarding how best to finance your company or anything at all to do with insolvency or liquidation, Real Business Rescue can help. Our team of licensed insolvency practitioners are perfectly placed to help you navigate all areas of business finance. Call us today on 0800 644 6080 to arrange a free no-obligation consultation at any one of our nationwide office locations. With 55 offices across the UK, you’re never far away from expert and confidential advice.
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