Capital Finance options

Avatar MIA

An Irish registered company is to be formed with three owners. The company will provide a service to a long established blue chip company. The service is an innovation on a service long provided. It's a high value industry. The company will enter into a contract with the company.

The initial capital investment will be circa €250k. Two of the individuals would be high net worth individuals, one of the high net worth individuals would be domiciled in Scotland with no permanent address in Ireland (although works here and passes Irish income tax).

It's been decided that the company would get a loan to fund the initial required equipment. The equipment itself would have very limited value outside of what is a relatively new industry, so of little collateral value.

It would be intended that the company would fund the loan from trade.

What institution would be interested in providing finance. Personal guarantees (jointly/severely liable) should be possible (if valid, due to one person not being Irish domiciled).

pedroeibar1

If the contract is bankable you should not really have an issue. What you need to do is make your proposal appear in the best possible light, and that you fully understand the deal/process. Lenders like to say ‘yes’ so your job is to make that decision easy for them.

That one shareholder is outside the State is not an issue from a corporate perspective, although some lenders could view it differently (e.g. if s/he had US domicile, or – not yet being viewed AFAIK – UK/Brexit).

Is equipment leasing a possibility? How ‘moveable’ is the asset should the project go wrong? Would it have a re-useable value? If it is a service and you need IT equipment have you considered the supplier’s credit offer?

Most borrowers IMO focus too heavily on security: what a lender always looks at is repayment ability. Get your business plan polished; concentrate on cash-flow, payment dates for the contract, how payment is triggered (on basis of work done/time/date). What are the credit terms – eom or eom + Xdays? Ensure you cover what happens should a dispute arise.
Joint and several g’tees don’t always work when there is an imbalance of the net worth/standing of the individuals – the debt-holder always goes after the easiest mark i.e. the wealthiest and that individual knows this.

You must ensure that two things are bolted down – the shareholders agreement and the contract with the customer. Be very wary of penalty clauses. Be aware that blue chip companies have a track record of ignoring issues, from contracts to payment terms when it suits, so you need to look at the downsides.

Avatar MIA

pedroeibar1 wrote: »

If the contract is bankable you should not really have an issue. What you need to do is make your proposal appear in the best possible light, and that you fully understand the deal/process. Lenders like to say ‘yes’ so your job is to make that decision easy for them.

That one shareholder is outside the State is not an issue from a corporate perspective, although some lenders could view it differently (e.g. if s/he had US domicile, or – not yet being viewed AFAIK – UK/Brexit).

Is equipment leasing a possibility? How ‘moveable’ is the asset should the project go wrong? Would it have a re-useable value? If it is a service and you need IT equipment have you considered the supplier’s credit offer?

Most borrowers IMO focus too heavily on security: what a lender always looks at is repayment ability. Get your business plan polished; concentrate on cash-flow, payment dates for the contract, how payment is triggered (on basis of work done/time/date). What are the credit terms – eom or eom + Xdays? Ensure you cover what happens should a dispute arise.
Joint and several g’tees don’t always work when there is an imbalance of the net worth/standing of the individuals – the debt-holder always goes after the easiest mark i.e. the wealthiest and that individual knows this.

You must ensure that two things are bolted down – the shareholders agreement and the contract with the customer. Be very wary of penalty clauses. Be aware that blue chip companies have a track record of ignoring issues, from contracts to payment terms when it suits, so you need to look at the downsides.

Excellent, thank you. The one I didn't think of was the Supplier finance. That's a great shout.

It is a piece of electronic equipment, that's very bespoke, while some hardware, it the proprietary software that would be the greatest cost, and therefore not transferable.

Yes, leasing would be an option - any advice on a particular provider?

Food for thought, thanks.

pedroeibar1

Avatar MIA wrote: »

Yes, leasing would be an option - any advice on a particular provider?

Sorry Avatar, I'm too long away from that sector to have worthwhile / UTD info.
Rs
P.

Avatar MIA

pedroeibar1 wrote: »

Sorry Avatar, I'm too long away from that sector to have worthwhile / UTD info.
Rs
P.

Okay, will give you a pass ... this once

Thanks again

gargargar

Check out this guarantee scheme for SMEs. Means that you won't need joint and several liability for the full loan amount (in qualifying cases). Obviously, as pedrobar said, the loan approval will depend on having business plan proving repayment ability.

Avatar MIA

gargargar wrote: »

Check out this guarantee scheme for SMEs. Means that you won't need joint and several liability for the full loan amount (in qualifying cases). Obviously, as pedrobar said, the loan approval will depend on having business plan proving repayment ability.

Interesting, although there is a 2% cost - but may be offset by lowering bank rates due to guarantee.

Worth keeping in mind.

pedroeibar1

The business has a target risk – a single contract with one buyer. Added to that concentration is the fact that the contract is front-ended to the tune of €250k.

Were I to spend +/- 2% of the contract sum I would consider spending it on credit insurance and assigning the benefits of the policy to a lender. It also is another way to enhance the credit risk and make it more attractive to a lender.

You should be able to buy a credit insurance policy to cover this specific risk and the premium should be less than the 2% mentioned above. The insurance (a ‘contracts policy’) will cover 90% of your initial outlay and 90% of any WIP/ outstanding invoices. The policy will not cover disputes, but having a credit insurer on your side in dealing with a big company is an asset as the customer is less likely to mess you around.

You’d need to get a quote via a big broker like Marsh or Willis.

Avatar MIA

pedroeibar1 wrote: »

You’d need to get a quote via a big broker like Marsh or Willis.

Very useful, and not for the first time, thanks!