Whilst the Government is doing as much as it can to assist businesses deal with the COVID-19 pandemic crisis there will be business owners who, despite such stimulus measures, will have no choice but to inject further cash into their business to stay afloat. Indeed, not all businesses will qualify for the various stimulus packages or they will not be able to meet the relevant benchmark requirements to qualify.
A secured line of credit is key
I am increasingly seeing clients look to inject cash into their businesses either as a direct cash injection from savings or from the sale of property, shares or other investments.
Unfortunately, clients may not appreciate the difference of contributing this investment as equity vs a loan and fewer will appreciate the advantage of lending the money to the business as a secured loan. However, in circumstances where no one really knows how long and by how much the economy will be affected by both the virus and the resultant Government ‘hibernation’ restrictions, my strong advice to clients is that where possible, any cash investment they make to support their business should always be via a secured line of credit. This is generally simply done with a properly drafted finance facility between the directors/shareholders and the business entity and properly drafted securities. The security generally taken is a general security agreement over all property (including any plant and equipment) of the business and a mortgage over any real property owned by the business.
In some cases, the investment by the business owners is not always obvious. One such example is where the directors of a company sell a personal property that is being used by the bank as security for a business loan or other finance facility. If that bank facility is paid out from the proceeds of sale the directors (or the entity that owned the real property) have effectively become the new financier to the business and the amount of the loan paid out to the bank would, if properly structured, become secured moneys under a new facility set up for the directors who would become the new secured creditor to the business.
What are the benefits of being a secured creditor?
In the worst-case scenario of the business ultimately failing after the Government handouts and various statutory moratoriums end, the new secured creditors to the business will be placed in a priority position to put in place a possible restructure of the business via the various methods legally allowed by the Corporations Act. On the other hand, if they had invested the money as purely equity, their claim as a shareholder ranks behind all creditors of the business. The difference could be saving the business or simply putting it into liquidation.
In many cases, there could be the option of them acquiring the business from a third-party administrator or liquidator on an arm’s length basis via a reduction of their secured debt rather than paying cash for the purchase price.
Many accountants do not fully appreciate the significant benefits of securing such an investment relative to the relatively insignificant cost of drawing up and registering a finance facility and security.
Where we can help
Our finance team has years of experience in both finance, insolvency and restructuring and can advise on and document such transactions very quickly and on short notice. We can advise you on how best to structure the transaction to provide the best protection. It is vitally important that any security interest obtained is properly registered either under the Personal Properties Securities Act or under the Transfer of Land Act.
I am able to provide a fixed cost quote for the preparation of such documentation. Please do not hesitate to contact me.