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Commercial funding for start-up businesses

in Finance and Funding

Secured commercial funding for start-up businesses One of the biggest hurdles for a fledgling business is raising the required capital. The traditional small business loan can be expensive and inflexible, and even with the Funding for Lending Scheme (FLS) helping to coax high-street banks into granting more loans to SMEs, it remains notoriously tricky to get an application approved.The commercial finance market has ballooned in the years since the financial crisis. The bridging loan market in particular has gone from strength to strength, as short-term lenders have been able to fill the rift left by mainstream lenders reluctant to expose themselves to post-crunch risk.With new entrants into the market jostling for business, products invariably become more competitive in terms of cost and flexibility. Products have even homogenised to a degree, with specialist buy-to-let and commercial lenders offering short-term options and bridge-to-let loans allowing borrowers to ‘term out’ to longer-term finance once the loan comes to an end.Here we will take a broad look at these two types of commercial funding. Bridging loans Bridging loans are so named for their ability to bridge the gap between a debt becoming due and credit becoming available, and can be turned around within a matter of days. The funds can also be raised for any legal purpose, meaning that anyone who can offer suitable security for a loan can use one to get cash fast.This makes bridging loans extraordinarily versatile; they can be used to circumvent property chains, expand business premises, purchase additional stock, convert or renovate property, plug cashflow gaps and take advantage of short-lived investment opportunities such as auction purchases. Terms can be as little as one day, and it is possible to find bridging loans with no early repayment charges from which you can make a quick exit with no additional cost.A bridging loan is either ‘open’ or ‘closed’. This refers to whether or not the loan has a fixed end date and exit strategy (such as further credit or the sale of the asset) in place. Whilst open loans – those without a fixed end date – are riskier and, as a result, more expensive, rates for either option are far cheaper than they were pre-crunch, ranging from around 0.65% to 1.50% per month.Although not every bridging lender will fund every type of deal, across the entire market it is possible to secure funding against almost any kind of property, including undeveloped or agricultural land, uninhabitable property, non-standard construction and commercial or semi-commercial property. The funding can be secured as a first charge – meaning the lender has first or sole priority for repossession if you default on your debts – or second or subsequent charge.It is also possible to secure a bridging loan against more than one property; indeed, by offering additional security, you can increase the LTV (loan-to-value) ratio of the loan to 100% or even higher, removing the need for a cash deposit.Most bridging loans are not regulated by the Financial Conduct Authority (FCA). However, if 40% or more of the property is intended for occupation by the borrower or borrower’s family, this will be classed as a residential bridging loan and will therefore be regulated. Commercial mortgages Commercial mortgages are intended to finance the purchase of commercial or semi-commercial property, with loan terms lasting from 3 years to 30. Commercial mortgages can be used to fund up to 75% of a property purchase but, like bridging loans, it is possible to increase this figure by offering additional security.Many commercial mortgage borrowers are looking to rent out their property to commercial tenants, rather than run the business themselves. In these cases, most lenders insist that the rent charged covers the interest repayments by a minimum of 125%. Either way, it may well be a requirement that you have some hands-on knowledge or experience in the industry you are targeting.Commercial loans are extremely flexible and tailored to the borrower. It is not uncommon for customers to finance entire property portfolios, worth millions, with a single commercial mortgage. Mortgages are underwritten on the basis of both the strength of the borrower and the viability of the asset; in short, lenders are not always beholden to rigid criteria. Like bridging loans, the FCA does not regulate most commercial mortgages. Key differences DurationBridging loans are short-term loans, rarely lasting longer than 18 months. Commercial mortgages typically last for a minimum of 3–5 years, and as long as 30.Application processMore information is usually required for a commercial mortgage application than for a bridging loan application. A lender will request borrower credentials – income and expenditure, assets and liabilities, proof of income, tax returns, company management accounts and a summary of the borrower’s relevant experience – as well as details of the property or properties to be mortgaged. Bridging loans generally require just an application form from the applicant and a valuation of the property, meaning the process is far quicker.CostWhether or not the interest charged on a bridging loan will be higher or lower than a commercial mortgage will depend entirely upon the individual circumstances of the borrower and the nature of their application. Commercial loans do tend to have lower interest rates; however, because the loan terms can be significantly longer, it is likely that you will still pay more interest in the long run.Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.Written by Ben Gosling for Commercial Trust, a dedicated broker for bridging loans, buy-to-let mortgages and commercial mortgages. For more information visit www.commercialtrust.co.uk.

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Commercial funding for start-up businesses

Voluntary Administration Process

The term voluntary administration is a bit of mix up of the two main rescue insolvency processes; administration and a company voluntary arrangement. The directors can opt to appoint administrators voluntarily and they have that power to protect their position.

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Voluntary Administration Process

Advice from Family and Friends

Health Warning for Directors - Well-Meaning Advice from Friends and Family This page has been difficult to write because all too often we see that directors of companies turn to members of their family for advice when they realise that their business is in a tricky financial situation. Unfortunately this advice is quite often completely wrong and potentially damaging.Family members offer advice about what to do but they are too close to the situation and, to be honest, are unlikely to have any actual expertise or experience of how best to act when a business is facing severe financial difficulty.  All too often, family members and loved ones will tell directors what they want to hear!The danger is that directors in a stressed frame of mind will not necessarily act rationally and such advice from family reinforces the illogical thinking. What’s more, friends and family may not have the same exposure personally and therefore actions taken probably won’t affect them as much. So what sort of poor advice are we talking about? Borrow more money!Often money is seen as the cure. Of course, normally the people who advise this are not the ones having to guarantee the loans!  Most loans direct to businesses often need to be personally guaranteed.  Is more money the answer? Really?  You have to look at the reasons why the business is running out of money? It might be the fact that the director(s) are incompetent on the financial side and need help. Fancy saying that to your nearest and dearest?Just put more personal money inThis advice is better than borrowing money but only if you can afford to! Remember that any money that is put in to a struggling business is at serious risk. Take out security if you’re prepared to put more money in. It costs a little bit more as you will have to register a debenture at companies house but if the company fails then you will rank above trade creditors and HMRC when it comes to getting paid.You will be disqualified if the business failsThis is completely wrong. Only if you have been fraudulent or deliberately misled creditors knowing the business is going to fail will you face disqualification or be personally liable for the debts (note that if you have personally guaranteed loans then yes you will be liable ). This worry tends to make directors “freeze up” and take no action out of sheer panic.You can’t be a director again if the company fails – Completely wrong again (see above).Your credit rating will be shot if the company goes into liquidation – Only if you have personally guaranteed loans to creditors and are unable to pay (see above about taking on more debt). Know the difference between creditors voluntary liquidation and compulsory liquidation. A compulsory liquidation will look worse on your record than a voluntary one if an extended credit check is done (sometimes these are requested if you are working in defence, financial services, insurance and other sensitive areas).You must pay creditor X before creditor Y This is a minefield.  Paying one creditor over another can be construed as granting a “preference” and can be reversed by the court or a liquidator if the business fails as a result of the preference or it was insolvent at the time.  What is more this can still happen up to 2 years after the transaction.Move some of the assets to another company for a £1 and start again?Careful as any transaction that is not deemed to have been done at fair value can be reversed by the court. In fact there are lots of Insolvency Practitioners who make a living getting these cases to court on behalf of creditors that feel they have been stitched up.HMRC will not negotiate and will just wind the company upHMRC enforcement are tasked with collecting 100% of the debt.  If this is simply not possible then they can negotiate on a reduced pay out over a period if the company proposes a CVA.  This is handled by another department of HMRC ( the voluntary arrangement service ) and they will take the case off enforcement.Don’t do a Company Voluntary Arrangement (CVA) as they don’t workOh really?  They are often the only chance that a business has and for the record the majority of them do.  The ones that fail are poorly put together or the company has not changed sufficiently to meet the rigours of paying back debts over a 3-5 year period.So if you are close to a director of a distressed business the best advice you can give is GET ADVICE from SOMEONE ELSE WHO IS AN EXPERT!This all sounds quite blunt but we want to help directors. We are currently dealing with a company where the director’s brother gave such poor advice that the director is now likely to lose everything; His house and a £1m business.  This inspired me to write this page as a warning to others.

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Advice from Family and Friends

Insolvency Toolkit for Directors

in Guides

Worried about your business? Concerned it may be failing? Need help fast but don't want to meet anybody face to face yet? Get all of our best guides and expert advice on one USB Drive FREE! This toolkit is available as a discreet USB device ( we do not mention insolvency on the drive itself ). You do not need to be connected to the internet to read all the guides to your options. What does it cover? The tests for insolvency Establishing if your business is viable. How to ask for time to pay your debts to HMRC Extensive guides on pre pack administrations, liquidation, company voluntary arrangements. A guide to all the legal actions that creditors might take and the issue of personal liability. What is an overdrawn directors account and why does it matter. How to raise finance to ease cashflow pressure. Your duties as a director of an insolvent company. Just plug in the drive and you can easily navigate to all the menus. The USB drive also includes Dissolution programme with all the letter templates and resolutions. A time to pay programme with all the letters and information needed to ask HMRC for more time to pay VAT/PAYE Daily cashflow spreadsheet to help you budget. Order your free toolkit and start taking action to save your business now. Please email robertm@ksagroup.co.uk to receive your complementary copy in the post. You can also request our FREE 80-page guide for worried directors here. We answer any questions you may have and provide detailed explanations on several insolvency issues.  

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Insolvency Toolkit for Directors

CVAs and Corporation Tax Losses

A company voluntary arrangement ('CVA') is one of the three main formal insolvency processes available to a company experiencing financial stress. The others include administration and liquidation.In a CVA, the company, its members and creditors agree on a programme for the settlement of the company's debts or a scheme of arrangement of its affairs. It is a restructuring process whereby the company enters into an agreement with its creditors to vary its terms of credit and usually involves a reduced payment in full and final settlement of its outstanding debts.There are a number of corporation tax issues relating to periods before as well as during a CVA and the main issues are covered below. Accounting Periods When a CVA is entered into as, depending on the terms of the arrangement and any restructuring envisaged, the company’s accounting period for tax purposes may be brought to an early end, and there may be restrictions on how any trading losses may be used. Further comments are included below. The start of an administration or liquidation process will always trigger the end of an accounting period for tax purposes. Tax Losses Where a company entering into a CVA has accumulated trading losses for tax purposes, the continued availability of such losses in future periods is likely to be a crucial aspect to the successful implementation of the arrangement. Assuming the company continues to trade throughout the CVA process, its unrelieved trading losses may be carried forward for offset against future profits arising from the same trade. Company Reconstructions Where there is a restructuring of the company’s trade, perhaps with a hive down to another [subsidiary] company, the transferor company will be treated as having ceased to trade and the transferee company is treated as carrying it on.Provided the beneficial ownership of the trade is held as to 75% or more by the same persons within two years after the transfer as before the transfer, the trade is not treated as permanently discontinued nor a new one set up. Trading losses and capital allowances, but not capital losses or non trade losses, may be carried across from the transferor company to the transferee and used against future profits from the trade transferred.However, if not all of the liabilities of the transferor company are transferred, the trading losses carried across are reduced by the amount of the excess of relevant liabilities over relevant assets retained in the transferor. Following the hive down, the transferor company will have ceased to trade and therefore will have no future trading profits. Any tax losses not hived down will effectively be lost as they can neither be carried forward nor carried back under any terminal loss relief claim which can be available in cases where there is no hive down.Where the transferor company has obtained tax relief for a debt owed which is released after cessation, the release will be taxed as a post cessation receipt unless it is part of a statutory insolvency arrangement. If the debtor and creditor companies are connected at the time of the release, the release will not be taxable under new rules applying from April 2009. Debt Waivers And Buy Backs Generally where there is a compromise of creditor claims, the element of the claim released will generate a profit in the debtor company for tax purposes. However, irrespective of whether the profit is trading or financing in nature, such a release in a CVA situation should be non-taxable under relieving provisions applying to statutory insolvency arrangements provided the actual compromise of the claim is specifically included within the terms of the CVA. Outside of the relieving provisions noted above, the normal tax rules applying to debt waivers and purchases have recently been revised particularly in relation to debt buy backs by connected parties. Generally, where a third party lender waives debt, the debtor company is taxed on the release. If the debtor company has tax losses to bring forward, the taxable release may be sheltered.Where a connected party acquires the debt from the third party lender at a discount, the tax charge which would otherwise have arisen in the debtor's hands by way of a deemed release on the acquisition of third party debt can be avoided, as under the loan relationship rules, waivers of connected party debt are ignored for tax purposes.Under the new rules on a debt buy-back, the deemed release of the debt can no longer be avoided simply by say having a newly formed company acquire such debt from the original third party creditor, unless one of three new exceptions apply, being the 'corporate rescue', the 'debt-for-debt' or the 'equity-for-debt’ exceptions.Following the initial acquisition of the debt, a subsequent release of the debt by the new connected party creditor will cause the debtor to be taxed on the discount received by the new creditor on its acquisition of the debt, less any amounts taxed in the hands of the creditor in respect of the discount, unless the exception to the deemed release rule, applicable on the acquisition of the debt, was the 'equity-fordebt exception'. Thus, subject to the equity for debt exception, the discount will come into charge to tax on the ultimate cancellation of the debt at the latest, notwithstanding that the debtor and creditor may be members of the same group at that point in time. It will not matter that the debt was not actually released by the original third party creditor.The new corporate rescue exception to a deemed release on acquisition of the debt is aimed at the scenario where a third party purchases the shares in the debtor company at broadly the same time as it acquires the rights under the relevant loan.relationship at a discount. If this exception is to apply, there is the requirement that, but for the change in ownership of the debtor company, the latter would within one year have been in insolvent liquidation or insolvent administration or would have met one of the other so-called insolvency conditions set out in the new rules. This could however be a difficult test to for the majority of debtor companies with third party indebtedness trading at a discount, outside of a CVA. Debt – Equity Swaps HMRC have recently revised their guidance on the statutory relief for a corporate borrower whose debt is released via a debt equity swap. Care will now be required where there are arrangements for a lender to sell the shares it receives on a swap.In addition, in a debt equity swap, the debt release must be in consideration of shares forming part of the ordinary share capital of the debtor company, or an entitlement to such shares, such as a warrant. Where a creditor, such as a bank, has no interest in being a shareholder in the debtor company and sells the newly issued shares back to the existing shareholders who do not want any dilution of their shareholdings, HMRC would deny the availability of the exemption to the swap. Intercompany Account Balances In certain cases, debt owed by a debtor company may include amounts outstanding on intercompany account which will often be a mixture of cash advances (loan relationships) and amounts owed for goods and services (which are not loan relationships). They may also include amounts paid on behalf of the debtor company which are not technically loan relationships but ‘non lending’ relationships. It is important to be able to correctly identify the components of such intercompany balances in order to apply the correct tax analysis particularly where they are waived or written off prior to a CVA.Recent case law has highlighted the importance of having full documentation to support tax claims.

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CVAs and Corporation Tax Losses

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