Think like a Bank – How to Build a Moat around Business Capital

From lockdown to slowdown, and then back up again the business cycles flow. Business is just like the four seasons and in order to reap the harvest in the spring we need to be able to endure the winter. For most business owners this means injecting more of their own capital into the business to keep it afloat. Whilst most of us don’t tend to think about themselves and their business as two distinct people, it is important to point out that from a legal point of view they most definitely are and for that reason, any capital that is loaned by you personally to your business should be treated the same as a loan to a perfect stranger. Just like a bank will not loan you money to buy a house without taking security, why would you loan money to your business without taking security over the business assets? One answer would be that “it’s my business and I can control what’s going to happen with the money”. Whilst that may be a perfectly logical response, it won’t provide any protection for the capital invested if market conditions worsen and the creditors come calling faster that you could anticipate.   

3 steps to safeguard your capital

1. Document the loan between you and your company in a Loan Agreement

Viewed simply, a loan agreement is a record of the nature of the money invested, how it is to be treated, how and when it is to be repaid and on what terms. In absence of a document confirming those things, all of those elements are up for debate.

2. Enter into a General Security Agreement (GSA)

A GSA sets out the terms by which assets are held as security for a loan. When dealing with a traditional SME the security could come in the form of ‘all present and after acquired property’ owned by the borrower/company (known as an “ALLPAAP” security) or a specific security granted over specified property, whether it be the clients, plant & equipment or other readily identified property.

3. Register on the Personal Property Securities Register (PPSR)

Registration on the PPSR is similar to the process of registration of a mortgage on title to a property, in that it presents a notification to all who subsequently deal with that property that there is a third party that has an interest in that property in priority to all subsequently acquired interests. This is the step that ties in and crystallises the operation of both the Loan Agreement and GSA.   

Food for thought

When loaning money to a business, whether it be a business that you own or to a third party, think like a bank in assessing the risk and obtaining adequate security (in the form of business assets, property, plant & equipment etc.) that you could take in the absence of the capital/cash investment being returned.