Corporate financing

Corporate financing is the process of managing a company’s funding and financial activities to support its operations, growth, and overall objectives. It involves obtaining and allocating financial resources to ensure the business can meet its obligations, invest in opportunities and achieve long-term success.

In this article, we will take you through your options, potential setbacks to think about, legal considerations to be aware of, and how we can help.

There are a number of financing options available, each suited to different business needs and circumstances. Here are some of the main options.

Bank Loans

Traditional bank loans are a common financing option, offering fixed or variable interest rates and repayment terms. A loan may come from a single lender (a bilateral loan) or a group of lenders (a syndicated loan). Flexible options include business overdrafts and invoice financing, which help manage cash flow. Companies can also use asset-based lending (securing loans against assets) or merchant cash advances (borrowing against future sales). Generally, Companies will borrow money and repay it by a set date. Until it has been repaid, your bank or other finance house will become one of your Company’s creditors.

Equity Financing

This involves selling shares of the company to investors in exchange for equity in the business. This can be done through private placements or public offerings. In addition, venture capital firms provide funding to startups and early-stage companies with high growth potential. In exchange, they receive equity and often take an active role in the company’s management. Equity financing, therefore, helps companies access large sums of money without incurring debt but involves the sharing of ownership and profits through payment of dividends.

Alternative Financing

A hybrid of debt and equity financing that involves subordinated debt or preferred equity that can be converted into equity if the loan is not repaid on time. This is also known as ‘Mezzanine Financing’. This type of financing offers higher returns to investors but comes with higher risk. It offers flexible access to funds up to a certain limit and can be used for short-term financing needs to manage cash flow or to raise funds for a specific project. Through this financing, the lender will only receive the equity after all other senior debts are paid off first.

Grants & Government Support

For some companies, often those involved in research and innovation, there may be an opportunity to access grants or regional support from the government and certain tax reliefs. If your business is looking to expand into international markets, financing from UK Export Finance (UKEF) may be available. This is an attractive option as grant funding does not need to be repaid, does not give another party any equity stake and may help to mitigate risk as the financial support is typically awarded based on project merit rather than financial performance.

Capital

Bigger companies can also issue corporate bonds that allow companies to raise capital by borrowing from investors. Bonds typically have fixed interest rates and maturity dates, making them a predictable financing option. This type of financing is often used when a company needs long-term capital for activities like expanding the business, buying assets, or investing in research and development.

As with any major business decision, you should always carry out suitable due diligence. Make sure you are aware of any potential setbacks or consequences that may impact the business, and that you fully understand your legal responsibilities if you were to go ahead with a corporate financing option.

To help, here are a few points on each option to bear in mind:

Traditional Bank Loans

Equity Financing

• Setbacks – Loss of ownership, equity and control. Investors may push for more control in order to fund the business which could further reduce your stake. Additionally, you may be required to consult with investors before making certain decisions.
• Legalities – Having the right agreements and protections (Shareholder Agreements and IP Protection) in place that cover rights, exit strategies, regulations and IP ownership are crucial.

Alternative Financing

• Setbacks – This can often be a more complex form of financing and may come with higher interest and costs as well as impacting funds by involving third parties.
• Legalities – Certain types of alternative financing may convert into equity if payments are missed, which can affect ownership. Ensuring terms are clearly defined can often help avoid disputes. You must also be aware of FCA Regulations that may affect lending.

Grants & Government Support

• Setbacks – Due to the strict eligibility criteria that often comes with this type of funding, not all business can apply for grants or be successful after application submission. Approval is not often quick, and the processes can take months and often applications are only granted for specific purposes. Therefore, this type of funding may come with strings attached, such as inflexible spending guidelines.
• Legalities –Compliance and correct agreements are crucial because of the repayment (if applicable), tax and reporting obligations and regulations involved in this type of financing.

Capital

• Setbacks – Along with strict regulatory compliance, this financing option often requires substantial financial and legal advisory fees. There is also the added risk of share prices fluctuating, which can affect company valuation and investment.
• Legalities – There are strict FCA and Stock Exchange rules that you must comply with, along with maintaining transparent governance structures. Furthermore, there are additional financial disclosures that companies must provide when issuing shares or bonds.

When considering corporate financing, you may be required to obtain independent legal advice on the terms of the facility, especially if you are providing security or a personal guarantee. For further information,n click here to read our Guide to Independent Legal Advice.

Choosing the right finance option for your business can seem like a minefield of legal requirements and limitations. Thankfully, our expert Business Law team are here to help guide you to the right option for your business and take you through the necessary legal processes and documents. Contact our team to book your FREE 30-minute consultation. Please note we are unable to provide tax or financial advice.

This article is for informational purposes only and does not constitute legal advice. Individuals should not act upon the information contained in this article without first seeking professional legal and financial (tax) advice.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
Or send us a message through the Contact Us page on this website.