Debt Financing and Security
Sources of Finance: General Principles
1. Importance of capital – if business goes bust it will impact economy
2. Debt is a prevalent source of finance
3. Bank can ask for a protein charge over company assets (security) – floating around (not
substantial control) – can crystalise = debt financing
4. Credit and security – senior over subordinate charge
5. Characterisation of security is a question of law
6. Priority hierarchy of equity financiers (shareholders) v debt financiers (creditors)
Fixed charge holders
Prudential creditors
Floating charge holders
Unsecured creditors
Shareholders
Terminology
Shares/equity Interest of shareholder in company – determines entitlement and
liability in company. Shareholders who purchase shares as a means
of providing finance to the company in return for an equity in the
company.
A representation of company’s net assets – s.33 Companies Act
2006, Borland’s Trustees v Steel Bros [1901]; Johnson v Gore Wood
[2002]
Only companies can raise funds by equity by selling shares
Securing equity financing can be easier than debt financing (&
absence of collateral), but the company must be extremely
attractive to investors, and you must be willing to surrender a
portion of your company and control. Equity financing can be risky if
not profitable – investors may try to negotiate for cheaper equity
Shareholders Hold shares in company – can be members when put on register
Members Agree to become members and register, do not have share capital
43
Sources of Finance: General Principles
1. Importance of capital – if business goes bust it will impact economy
2. Debt is a prevalent source of finance
3. Bank can ask for a protein charge over company assets (security) – floating around (not
substantial control) – can crystalise = debt financing
4. Credit and security – senior over subordinate charge
5. Characterisation of security is a question of law
6. Priority hierarchy of equity financiers (shareholders) v debt financiers (creditors)
Fixed charge holders
Prudential creditors
Floating charge holders
Unsecured creditors
Shareholders
Terminology
Shares/equity Interest of shareholder in company – determines entitlement and
liability in company. Shareholders who purchase shares as a means
of providing finance to the company in return for an equity in the
company.
A representation of company’s net assets – s.33 Companies Act
2006, Borland’s Trustees v Steel Bros [1901]; Johnson v Gore Wood
[2002]
Only companies can raise funds by equity by selling shares
Securing equity financing can be easier than debt financing (&
absence of collateral), but the company must be extremely
attractive to investors, and you must be willing to surrender a
portion of your company and control. Equity financing can be risky if
not profitable – investors may try to negotiate for cheaper equity
Shareholders Hold shares in company – can be members when put on register
Members Agree to become members and register, do not have share capital
43
