Security Terms Explained
If you are considering any type of business finance, its important before you enter into any type of discussion. That you start to get your head around some of the key fundamental security terms.
I have spent some time crafting out some of the key terms that my readers should understand. If you do decide to go forward with an application to one of our alternative business finance providers.
The following security terms include:
- Directors Guarantee
- Personal Guarantee
- Cross Company Guarantee
What is a debenture?
A debenture is the security term given to the loan when the finance agreement is in the name of the company. So, one key thing is that first you will need to be company registered (You can register direct at companies house for just £12.00 click here to register). Any charges to the company’s assets must be recorded at companies house. Also, in most cases for property charges they will also be recorded on the land registry.
How does it work?
You are looking to grow your business and need to access working capital. Your chosen funding provider requests security from the company. This will then need to be agreed before the finance agreement can be put in place.
The debenture is then requested, this provides the funding provider with security. They will place a charge over the company’s property.
What is a charge?
First, there are different two types of charges:
Let’s start with the fixed charge, this is when the charge is secured on a property.
So, for example, the company owns the property from which it trades. The finance provider could ask to take a fixed charge over the property as security.
A fixed charge can also be taken over pieces of machinery, shares, intellectual property such as copyrights. Patents, trademarks etc.
A floating charge is slightly different and its again only available for companies. In this situation the funding provider will take an overall charge on all the company assets. Now this is not just the present assets but also includes the future ones as well.
The floating charge is the most popular as it allows companies without any specific assets like premises to still borrow.
For example, your company has lots of plant and machinery, a floating charge will let you use this as security.
The special nature of the floating charge allows the company to use the assets. While still buying and selling them in the ordinary course of business. This means the business can continue to trade without having to continually request consent as with a fixed charge.
You can now see how the charge floats over the assets charged rather than fixing them to anything specific.
How are terms set?
The company will agree an amount it wishes to borrow. This amount will be repaid at some point in the future. The amount borrowed will be repayable on a fixed date every month or repayable on demand.
The debenture will specify both how much and how often the interest needs to be paid. The rate can be either fixed or fluctuate according to the bank rate.
Why do some funders require a debenture?
Some not all business finance providers will want security for the monies they provide. The main reason for this is should anything go wrong, and the company starts to default on its repayments. The funding provider has the right to appoint an administrator receiver. Plus, it also gives them power to sell the assets covered by the charge.
Some facts that you should know
I think its important that you understand that anyone holding a debenture over your company. Will not have the power to vote at any of your company shareholders meetings. However, they can hold separate meetings on anything that directly concerns changes to any rights which are attached to the debenture.
So, what are some of the advantage for you the business owner.
I think that one of the main advantages is by giving a denture over the company’s assets. Noteworthy, whether that is fixed or floating the result should equal lower interest rates for the company.
As you start to grow your business will lose its flexibility. This will be due to the restrictions which have been imposed on the company’s assets, so you will not have the freedom to do what you like.
We have already discussed the charge needs to be registered at companies house. However, doing this is not the responsibility of the funder. It’s the company’s responsibility. Make sure you do this within 21 days by submitting form MR01 or Mr08 together with your certificate copy of the debenture.
What is a mortgage
If you are asked to provide a mortgage as security, it’s like a charge except that it involves the actual transfer of ownership of the title of the asset to the funding provider by way of security.
For example, the company owns the office space that it works in. The lender would ask for the title to be transferred over to them.
The condition will be set that once you have fulfilled your obligation to the lender. The lender will then transfer the title back to you.
You can already now see that this type of security gives the lend the power over the asset. It stops you as the business owner selling or disposing of the asset.
There are two types of mortgages:
Lets start with the legal, the legal mortgage prevents you the borrower from having access to the mortgaged asset. Its stops you from disposing or selling the asset while its under mortgage.
The legal mortgage can also be granted over any property, plant, machinery, fixtures and fittings.
The equitable mortgage is when you the property owner must transfer the title deed to the lender. This then creates a charge over the property. You must then orally confirm the intent of creating the charge over the property.
One thing to be aware of is that with an equitable mortgage. No legal procedure is involved. This means no formal, legal document is created, executed or registered. However, it is still considered mortgaged in the eyes of the law. You then submit the title deed to the lender as security.
Over the years legislation has affected the way a legal mortgage over property is created. Noteworthy because of the Law of Property Act 1925 (LPA 1925).
Instead of transfering the legal title of the property to the lender. A legal mortgage of property is now created by the borrower executing a document creating a charge by way of legal mortgage. This is also sometimes called a “legal charge” so that the terms “mortgage” and “charge” have now become interchangeable when referring to security over property. Technically they are different legal concepts. Even though title is not transferred to the lender (as it is with a mortgage of other assets) this type of security interest gives the lender equivalent rights and creates a legal interest in the land.
Usually they fall into three types of guarantee:
- Cross company
What is a personal guarantee?
A personal guarantee is an unsecured written promise from a business owner. For example, your company cannot make the payments. As the guarantor you agree to step in and make the payments on its behalf. However, as the personal guarantee is unsecured its not tied to a specific personal asset.
Noteworthy, sometimes the funder may seek the personal guarantee to be supported by personal security. This could include taking a charge over your home. If this is the case, potentially it would then be easier, should the need arise to seek enforcement. Should the business default on any of its payments.
Something to think about
If this does come into the equation, and you find yourself with no choice but to provide a personal guarantee. Consider the option of negotiating a capping on your liabilities at the agreement drafting stage.
This might not even be possible with some finance providers, however it’s still worth a shot.
Advantages of giving a personal guarantee
The main reason it will help you to secure those all important funds. Especially if you are still in the early stages of your business.
However, if you can demonstrate growth and have a turnover over £500k. I would consider checking out some of our partners in the PAYG business finance section of our website by clicking this link. Where you will find partners that provide unsecured funding alternatives.
Anything related to personal guarantees should come with a risk warning.
However, in the early stages of your business it could be the only way you can secure funding. Unless you decide to think outside the box and push for something like Crowdfunding.
If you still feel compelled that a personal guarantee is the way right way forward. You may want to think about taking out a personal guarantee insurance product. This at least will limit your risk.
Cross Company Guarantee
You should be able to negotiate a far better interest rate.
You are tied into a specific lender, this could then have a negative impact across all your businesses.
What is a cross company guarantee?
Let’s start with an example, lets say you have a restaurant that’s been trading successfully for over 10 years. You are keen to expand your business and would like to set up a second site. You decide that you would like to purchase the premises rather than lease.
When you find the right premises, you set up a new company in which you want to purchase the premises. Then you try to purchase the premises through the new company. However, it has no trading history or assets. The lender would seek to take a floating charge over the asset plus take a security with a cross company guarantee.
So, in a nutshell a cross guarantee is a arrangement between two or more related companies. The relationship is usually when the Directors own the shares in all of the companies. This allows for reciprocal guarantees for each other’s liabilities, fulfilments and promised obligations
If you are looking to grow your business. You may want to check out my website. On the website you will find leading alternative funding solutions for your business.
I pride myself on sourcing and partnering with some of the leading names in PAYG business finance you can view all my partners here . If you decide to complete an expression of interest form for one of my partners. I will personally complete an initial review of your business proposal.
As part of my service to clients I offer a pre screening of your application, based on the eligibility criteria. Followed by submission and negotiation service with the chosen provider.
Furthermore, should your business be selected as a client I will provide the mentioned service free of charge.