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Thursday April 9, 2020


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Business Funding



The information contained in this summary is intended to outline in general terms issues surrounding the funding of your business.

Every business is different and requires different forms of funding or capital at different points of its life cycle.  Businesses are not static, the goal of most business proprietors is to grow revenue, which requires capital to fund its expansion.

Please note that your own circumstances may involve aspects which are not expressly mentioned in this guide.  Similarly, there may be information contained in the guide, which is not relevant to your own situation.  This is a general guide only.



The most obvious choice of funding and usually the cheapest is bank finance.  However, you will need to have your business case prepared in advance.  This should be undertaken by your accountant to show your projected profit and loss statement for the next financial year, together with some valid assumptions about the likely conditions that your business will face over that period.  You should undertake a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats), of your business to present to your banker.  This will demonstrate to your banker that you have turned your mind to business risks.

After reviewing your likely projections; you will want to discuss with your banker, term loans to restructure any fixed assets and ‘structural’ assets, that may remain static over a longer time period.  Sometimes these assets may be better parked off the balance sheet as operating or finance leases.

Any peak cash requirements over the projected period should then be rolled into an overdraft facility.  This usually recognises that during certain periods your cash requirements may be greater in some months than in other months when cash flow is higher.  One item, which chews into your cash flow, includes funding sales expansion - more sales correspond to more debtors, unless you maintain a strict credit policy.  You may need to review your terms of trade and credit policy, and ensure that you have registered any security interests under the Personal Property Securities Register (PPSR).



The bank will generally take security over your business assets by way of a General Security Agreement registered on the PPSR.  This is the new version of the old form of debenture which is a floating charge over the company’s or business’ assets.  This allows you to continue trading without recourse to the bank for consent to deal with any transactions that are in the ordinary course of trade.  Generally anything not in the ordinary course of trade would require the bank’s consent (e.g. sale of part of your business etc).  The bank will also take security against any real property; your house and any other property investments.  In exchange for secured lending, your interest rates ought to be lower depending on your risk profile.



Any time you look outside your family members for funding (excluding obviously bank funding) you run the risk of breaching the Securities Act.  This may take the form of a debt security, or sale of part of the business by way of an offer of shares in exchange for cash or some other form of securities.  This leads to an analysis of who you may approach for funds and what limits are placed on that approach.  These are recorded as exceptions to the Securities Act.  Unwittingly, breaching the Securities Act can result in charges being laid against the issuer and promoters of the securities (usually the business proprietor seeking funding) and worst of all, a requirement to return investors funds.

Paradoxically, it will not be at the time of seeking funding or obtaining that funding from an investor (when they are enthused about your business) that any issue arises, it will be when something goes wrong and the investor wants his or her money back, that a complaint is laid under the Act!

What members of the public may be approached for funding without having to prepare a prospectus under the Securities Act? The exemptions include:

  • Relatives or close business associates of the issuer.  Each potential investor must fall under either of those two classes.  A person who you may see down at the club would not be a ‘close’ business associate for instance;
  • Persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money.  An example would be the recent “Dragons Den” TV series, where entrepreneurs pitch for investment seed capital;
  • Any other person selected otherwise than as a member of the public (very limited circumstances);
  • A person who is required to pay a minimum subscription price of at least $500,000.00;
  • Wealthy investors who have net assets of $2 million or more, or annual income of $200,000.00 or more (but needs to be certified by a chartered accountant as such);
  • Experienced investors (but needs to be certified by an independent financial adviser).

At Currie lawyers we can assist you in navigating your way through the Securities Act and advise you of the best way to structure your business funding.  If a prospectus is required, we can facilitate its preparation in conjunction with your accountant.






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