Property Issues

Depending on the type of business the company operates, it may need industrial premises, a general commercial or office space upon commencement of trading or during its life (as part of any expansion plans). The premises you occupy for your business could be either a property that you own already or intend to buy, or one that you intend to rent from the owner/landlord.

If you are going to rent premises it is important that the terms of the lease are appropriate for you: rent amount, frequency of payment, intervals of rent review, space occupied and access, permitted and prohibited activities and also that you understand your obligations such as insurance, additional outgoings and maintenance. Additionally, a lease once commenced will usually be for a period of years and the liability will continue to exist even if you subsequently decide to wind-up the company’s affairs.

You may, as a director of the tenant company, be asked to provide a personal guarantee of the company’s obligations under the lease.   This obviously leaves you at great personal risk.

You may even be considering working from home. Apart from the very practical consideration of whether your home is suitable for the type of business you have in mind, you will also need to consider whether there are any restrictions against your business activity being conducted there: are there any planning use restrictions affecting the area? Does your lease or tenancy agreement prohibit operating a business there or do the terms of your mortgage say that the property cannot be used for a business? Does this invalidate your home insurance?

It will be important to check for these restrictions and, if necessary, obtain consent before you start or you may risk the business being interrupted it you are required to move or cease operating.

Alternative Forms of Funding – Asset Based Lending

This is becoming increasingly more common nowadays and covers all forms of funding that company’s can take advantage of based on the assets they own or purchase.  A common example may be finance raised against plant and machinery or vehicles, either upon acquisition or otherwise (provided they are not already subject to a finance arrangement) or on stock in trade (as the time difference between ordering and paying for such goods and selling them on can prove debilitating for a company in terms of its cash flow.

The most common form of Asset Based Lending is factoring and invoice-discounting.  These are a form of lending which is based upon the invoices raised by the company.  

The benefit for the company is that it obtains access to cash quickly – between 50-80% (dependant on the company’s risk profile and the sector it works in) of an invoice may be paid as soon as it is raised together with the balance (less a fee) being paid when the invoice is collected.

This is very useful in circumstances where invoices take a long time to convert into cash.  However it does carry the added burden of the associated fee which acts like interest but is at a higher rate.

The type of arrangement a company enters into very much depends on many factors and it is essential that the business obtains the right fit when considering this option.  At Francis Wilks & Jones we can assist with these matters.

Buying/Selling Goods and Services

The most important aspects of a contract for the purchase or supply of goods or services are that terms and conditions of the contract are properly on notice to both parties before the commencement of the contract (i.e. upon the purchase order being made) or by way of a course of dealings over a period of time (where the terms and conditions have become accepted, although this can be less certain).  

In addition to the general mechanics of the operation of an agreement to buy or sell goods and/or service, both purchaser and seller should have agreed terms which include the following:

1. That the purchase order contains a specific description of what goods or services the company is providing, including details of the number, condition and price.  These can all be reflected in the order form.
2. Terms for payment: when, how, to where and the consequences of late payment.   
3. With regard to any rolling or ongoing supply, the terms and conditions will have to address the commencement, duration and method of termination of the agreement
4. The parties and the ability transfer the agreement to a third party.
5. Terms relating to supply, inspection, rejection and substitution of goods.
6. The effect of breaches of the agreement and remedies available and the general mechanics of the operation of the contract.

Although most trading arrangements proceed seamlessly, it is often the case that sooner or later a disagreement will occur and in these circumstances the only point of reference will be the agreed terms and conditions applicable to the sale and purchase of those goods and services and whether they were properly incorporated into the contract.

Trading Issues: Matters To Consider For All Companies

Upon starting-up a company, the directors have to consider the company’s business and its trading relationship with customers and suppliers.  

In particular the directors should consider the following:

• The company’s trading address and the business lease it enters into.  Business leases can be quite onerous, tie the company in for a long time, prove very expensive and not be flexible enough to cope with any future changes to the company’s business.
• Its employees and the employment contracts it enters into – are they temporary contracts (more expensive but without employment rights), part-time or full-time permanent positions (less expensive but they come with sickness, holiday, redundancy and notice rights if you wish to reduce your workforce)?  
• What are the terms and conditions of business with suppliers of goods and services e.g. utilities, stock, office materials etc.  How and at what stage is a contract formed and the legal concerns the company has to be aware of.
• Similar considerations should exist in respect of customers.

The business itself, its employees, funding and property issues summarise the main problems faced by all companies and mismanagement of these aspects leads to a majority of company failures.

These problems can be avoided by proper management and planning, as well as dedicating some resources to less “pressing” issues such as information management, accounts and tax affairs.

Shareholder’s Agreements – Part 3: Drafting a shareholder’s agreement

The shareholder’s agreement should ideally be drafted with legal advice to prevent any risk of prejudice to any party.

The agreement obviously need to reflect the intentions of all shareholders, who should have input into it and discuss its contents before approving and executing the document.  The shareholder’s agreement should ideally be held within the company records but will be a private document that is not required to be filed at Companies House.

Most importantly a Shareholder’s Agreement:

1. Should be executed before the company commences trading;
2. Should be signed by all shareholders;
3. Should be registered at Companies House;

You can in essence put whatsoever you want into the Shareholder’s Agreement.  

However, it must not conflict with any legal requirement and may be invalid in the event of any misrepresentation to a signatory, any fraud in respect of the agreement or any mistake as to the intended purpose.  

It is always recommended that, to make it watertight, you should as a minimum seek legal advice on the contents of a Shareholder’s Agreement and, preferably, ask a solicitor to draft the agreement on behalf of all shareholders.  

Once signed it is can only be amended with all parties’ consent and otherwise is irrevocable and binds all parties.

Types of Funding

As described in our previous blog, whilst funding is critical to a company’s business it is also vital to ensure the right product is obtained relevant to the company’s business needs.

Whilst there are numerous financial products available out there, the most common forms of lending to companies are as follows:

1. Fixed Charge - this is similar to a personal mortgage and is normally charged against a specific company asset and registered at Companies House.
2. Floating Charge -  this is similar to a fixed charge in that it is secured against property and often accompanies a fixed charge (referred to as a debenture).  The difference is that the charge is usually secured over all of the assets of the company such as book debts, stock, equipment etc.  To ensure the company can trade without the disruption of having to obtain a release when each and every item of stock is sold or every book debt is collected, this charge floats over such assets and only crystallises (i.e. becomes fixed on assets) in certain circumstances.  This is also registered at Companies House.
3. Unsecured loan - as with any secured loan, this is normally something available upon application to any commercial bank and may be affected by the company’s credit rating.  As such it may be difficult to access for new companies or companies which have experienced trading difficulties.
4. Government support - the government’s Enterprise Finance Guarantee is a state sponsored form of commercial loan available through high street banks to businesses which satisfy certain criterion.  It is aimed at companies which have experienced difficulties obtaining finance and may be used to take over existing facilities.
5. Overdrafts - these are the most common and most expensive form of lending used by companies.  The advantage is that it is easily accessible, flexible and provides instant access to funds. The disadavantage is that it is the most expensive form of credit, accounts can be frozen at a moment’s notice and they give directors and companies a false sense of solvency.

The above models can exist in various forms and crowd funding is a modern example of funding, which essentially comprises a loan secured by any or the above mechanisms.  

Funding a Company

Unless shareholders have cash resources or set-up a company as an investment, it is most likely that the first consideration, or as part of ongoing expansion or funding plans, will be the method of funding to be relied on by the company.  

The methods of funding a company are varied and dependent on the business and finance needs.  

Often directors will be asked to guarantee such liabilities from their personal assets and so caution should be taken when considering the loan period, the amount, who will control the lending and the charges and interest applicable.

The finances of a company are the bedrock for continued trading and to ensure the company can carry on as a going concern it is essential to maintain an adequate cash flow and a solvent balance sheet and choose the funding model that is appropriate to the company, its business plan, the shareholders’ wishes and, most of all, is realistic.