Company Finance and Mortgages

All companies need finance to operate. Finance can be obtained internally (equity finance), that is, capital provided by the owners of the company as shareholders. Finance can also be obtained externally (debt finance), that is, loans or credit provided by lenders or creditors. Inevitably, finance provided from external source requires some form of security by way of mortgage or charge.

Equity Finance

For a proprietary company, up to 50 shareholders can get together and provide finance but for a public company the number of shareholders is unlimited. By providing finance, shareholders retain ownership of the company. The return to shareholders on their investment is by way of dividends. There are different types of shares:

Ordinary shares - most common form of shares, which can be in different classes with or without voting rights at the annual general meeting
Preference shares - theses shares attract fixed annual dividend and have preference over ordinary shares for dividend and capital in winding
- Convertible preference shares - these can be converted to ordinary shares after a period of time
- Cumulative preference shares - if fixed dividend is not paid in one year, it is paid in the next
- Participating preference shares - after receiving fixed dividend, shareholders can also receive a portion of the remaining profit once the ordinary shareholders are paid divided
Contributing shares - these shares are not fully paid and require further payment in future. Dividend is paid according to the proportion of the paid-up amount
Bonus issues - free shares being issued to existing shareholders in proportion to their shareholding
Rights issues - right given to existing shareholders to purchase new shares being issued in the company to raise capital
- Renounceable rights - this can be traded in the stock market if the shareholder does not wish to purchase new shares
- Non-renounceable rights - this cannot be traded as the right to purchase the new shares lapses after a particular date

Another alternative to raising equity finance are:

venture capital or private equity - where managed funds invest in equity of the company
mezzanine finance - a form of finance that combines equity and debt to suite the investor and the company and is riskier than the debt finance
angel investor - a wealthy individual acts like a venture capitalist by investing their own funds in the company

However, there are limitations as to how much shareholders can provide for the company to invest and grow. Hence companies require other sources of finance.

Debt Finance

Companies can raise finance from the public by issuing:

Debentures - are evidence of debt and can be secured or unsecured and gives the holder priority over the shareholder in winding up
- Redeemable debenture - can be redeemed at the option of the company
- Perpetual or irredeemable debenture - debenture in which no day is determined for repayment of the principal
- Convertible debenture - debenture like convertible note that can be converted into shares
Corporate bonds - are like government bonds in which a company acknowledges that a stated sum is owed ad will be repaid at a certain date
Convertible notes - these are convertible into ordinary shares of the company at a set price
Swaps (forward or future) - where a party pays a fixed interest rate to another for a variable rate debt instrument
Options - a derivative which is a contract giving the holder the right to buy or sell an underlying asset at a specified price within a period of time
Hybrid securities - these are a mixture of debt as well as equity, e.g. a security that pays interest but is convertible into shares

A company can also raise finance for its operations from other creditors and lenders in the form of:

(a) trade credit

(b) business credit cards

(d) business bill facilities

(e) business line of credit

(f) term loan or margin loan

(g) trade finance facility

(h) receivable finance or debt factoring

(i) vehicle and equipment financing - hire purchase, finance lease or operating lease, novated lease or fleet leasing and management

The return for lenders of finance is interest.

Mortgage or Security

For almost all of debt finance from lenders, the company needs to invariably provide some form of security, for example:

mortgage over a property, chattel, shares and other marketable securities
charge (fixed or floating) over the company's property, chattel, shares and other marketable securities
assignment of book debts
stock mortgages, crop liens and wool liens
personal guarantees from directors as collateral
negative pledge

Some forms of securities such as mortgages are registered at the Land Titles Office or its equivalent in the relevant State and are shown on a title search, whereas a charge is registered with Australian Securities and Investment Commission (ASIC) and is shown on a company search.

By giving security, the lenders have some assurance that they have a right to the assets to back the monies they have provided. In winding up, the lenders also have priority over non-secured lenders and shareholders.

More Business Law services:

ASX Listings and Compliance
Business Documentation
Business Structures
Contracts/Advice
Commercial Leases
Corporations/Companies
Corporate Governance
Dispute Resolution & Litigation Services
Franchising
Intellectual Property
Joint Venture Agreements
Liquor Licensing
Management Agreements
Partnership Agreements
Reconstructions/Restructuring
Sales and Purchases of Business
Shareholders' Agreements
Terms of Trade
Trade Practices