Legal-Ease by Rob Kuyek
You seem to be the victim of your own success. Business is booming but the company needs to obtain new credit facilities or increase its existing one to finance the operations and provide for future growth. How do you go about obtaining a business loan, and what type of security will the lender ask for?
In general terms, obtaining a loan for your company to finance a capital expansion or to establish or increase a line of credit is similar to obtaining a personal loan. The first step is to contact your existing financial institution. If you don’t presently deal with a financial institution or are considering moving to another lender, ask family, friends or your trusted advisers (i.e. your accountant or lawyer) for a referral.
A detailed business plan setting out the intended use of the funds will be required, together with the standard financial information required by lenders. This will include tax returns, financial statements, a list of assets owned by the company, a current accounts receivable list and particulars and amounts owing to existing lenders. Depending on the type of business, the credit risk, the amount of funds required and the assets owned by the company, the lender will determine the type of security required to secure the loan.
Lenders don’t give companies loans on a simple promise that the loan and interest will be repaid. The lender requires security and “liens” on the land, inventory and equipment owned by company or to be purchased by the company to secure the loan. If the payments are not made and the loan is in default, the lender will proceed to enforce its security by selling the assets which the liens are registered against and applying the proceeds against the loan.
The security required by the lender depends on a number of factors such as the amount of the loan, credit risk, business history, financial performance and the type and extent of the assets owned by the company or guarantors. Security which would be typically required by the lender would be as follows:
1. mortgage on the land owned by the company or to be purchased with the loan proceeds.
2. general security agreement, which is basically a charge on all other assets owned by the company other than land.
3. assignment of the quota, if any, owned by the company if the company is involved in the agricultural industry and owns quota.
4. personal guarantees of the principals and/or the shareholders of the company.
5. security such as mortgages and general security agreements from the personal and corporate guarantors.
Institutional lenders will generally require a first charge on the assets. If there are existing liens on the assets of the company or the guarantors, they will either have to be paid in full from the new loan proceeds or a priority agreement will be required giving the new lender a first charge on the assets. In the event you are signing a contract of purchase and sale to purchase land or equipment, ensure there is a condition in the contract making the contract conditional on the company obtaining the required funding from a lender. If you can’t secure the necessary financing, you don’t want to be obligated to complete the purchase.
Rob is a partner with RDM Lawyers LLP practising in the areas of business law and commercial lending.