Financing

Banawe

We are in the process of starting our new business. We decided on Ltd to separate our personal properties (our house).
We need some funds to rent a shop, fit it and get some stocks, between 30 - 40K. The financing part is not clear:
If we remortgage our house, then we are personnally liable for it in the worst case scenario. This goes against the idea of being Ltd, doesn't it?
We went to our Building Society to test the water, but we felt that we could not really say that the purpose was to start our new business. Coud they refuse us for this reason?

What chances do we have if we ask a loan for our business to a Bank? Are the rates very similar between the various establishments?

Please advise.
Thanks & Best regards.

Sophie

Petmidget

I am afraid in reality you are unlikely to be able to seperate your personal assets from the business in a start up.

Your 3 likely scenerio's are;

1 You remortgage your house and in effect loan the business the money, if business fails it cant pay the additional mortgage, you end up paying it.

2 The business borrows the money with security given tied to your house, the business fails, it falls to you to pay if you cant then the house is up for grabs.

3 The business borrows the money and you give a non specific guarantee, then as 2 in reality.

Banks will not in this day in age lend a penny to a business without security of some sort, so they are almost always guaranteed to recoup the money should the worst happen.

You may wish to consider the finance broker market. They source money outside the high street but in the real world most institutions will not lend money unless they see 2 routes of repayment, the loan payments and the secrity you can put up.

Otherwise you have to live with the fact if you need money to set up a business then your personal assets will to a certain extent be at risk until the business can provide it own security.

The advantage of a ltd co at this stage is you are protected from other non secured debts incl trade creditors, vat, paye, hp etc claiming against you personally.

On a brighter note, you may qualify for Small Firms Loans Guarantee Scheme. it can provide government backed security for start ups/small businesses if you cant provide security yourself though it will bump the cost of the loan.

Astaroth

It is worth speaking to an accountant in my opinion.

As you say, your company and yourselves are seperate legal entities. The mortgage is in your name and therefore you are liable for paying back the money you borrow against it. However you would be entitled to loan the company and could charge the company interest on its repayments to you... you would have to check with the accountant what interest you can charge and how this works with your personal tax liability etc

Petmidget

The real issue here is how to get the money required without risking the house, the answer is I am afraid not possible, except to look into SFLGS, which can be prohibitively expensive for some people.

If you loan the company money and charge it interest then you pay tax on it, the company will get relief on that interest, not worth it really. Most shareholders that loan money into a company do not charge interest, its pretty much a waste of time.

I would still say your best bet is speaking to a independent finance broker, there could be an alternative to borrowing cash that depends on your circumstances, for eg HP'ing any assets you need to buy or stock finance, debtor factoring, a whole myriad of products the banks dont supply or are uncompetitive on.

FYI i am an accountant and business financing is part of my bread and butter. I could recommend a few people but that isnt reall yin the spirit of the forum.

motorguy

Astaroth wrote:

It is worth speaking to an accountant in my opinion.

As you say, your company and yourselves are seperate legal entities. The mortgage is in your name and therefore you are liable for paying back the money you borrow against it. However you would be entitled to loan the company and could charge the company interest on its repayments to you... you would have to check with the accountant what interest you can charge and how this works with your personal tax liability etc

we did something similar when we started our limited company - we 'lent' the company our own money.

BTW, what you are really asking is can you start a limited company, whereby if it goes under you are under no risk of having to pay the money back, and asking someone, ie a bank to lend you £40K, so i suppose you can see the banks reluctance...