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:
- Fixed Charge - this is similar to a personal mortgage and is normally charged against a specific company asset and registered at Companies House.
- 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.
- 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.
- 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.
- 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.
