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There are several sources of finance for a Limited Company which may be classified as follows:
Although authorised capital is important to us as creditors, it is the issued capital that is our main concern, not only does this represent the permanent finance of a company and as such cannot be removed, it is also an indication of who is financing the company, the members or the creditors. This is of particular significance to the creditor as the number of shares issued represents the limit of a member's liability and incidentally, the degree of confidence displayed by members who in a small private company are also usually its directors.
As an example let us examine a company that has a nominal capital of £1,000 of which £10 has been issued and full paid. The liability of the members (who incidentally are usually the promoters) would be limited to £10. Regretably this is not an isolated case as such companies are all too common. Furthermore, many of these companies seek credit as a commercial right and unsecured liabilities of many thousands of pounds are apparent from balance sheet analysis. Although it is understandable to make arbitary decisions in these circumstances, caution must be exercised when appraising such companies. In general terms therefore, it is reasonable to suggest that where shareholders - directors have a substantial paid-up investment in a company, prime consideration will be paramount in sustaining and preserving that company.
Before going on to unsecured loans it should be borne in mind that issued capital may be for cash or a consideration. Cash of course needs no further explanation. Allotment of shares for consideration is the exchange of an article, a process, a patent or expertise. This method of issuing capital is usually used by those companies that have been formed from an existant partnership, the partnerships assets being used as the consideration. However, it is easy to be misled as to the true worth of such assets and where a company has recently been formed and the issued capital is for a consideration. The agreement between the company and seller (which can be found in the company file) must be inspected. However, with the passing of time considerations take on less importance.
For varying reasons a large number of companies trade with a purely nominal capital in relation to the company's needs. The most common example being those £100 companies of which two £1 shares have been taken up.
It would be ludicrous to suggest that any company could exist with such a small capital. Where these circumstances exist, it is usual to find the company supported by unsecured loans from its directors. Subsidiaries of substantial holding companies are also frequently capitalised on a similar basis.
Where director's loans are unsecured and providing there is no agreement as to when they are to be repaid, they will be shown in the accounts as a current liability, and as such may be withdrawn at any time. This consideration apart, in the event of a liquidation unsecured loans rank equally with the unsecured trade creditors. The following example is not untypical.
| Authorised Capital | 2000 |
| Issued Capital | 2 |
| Current Liabilities | |
| Directors Loans | 5000 |
Although it is difficult to generalise, very restricted credit should be given to private associate companies relying almost entirely upon outside finance for working capital. In the above illustration one would ask why the director's loans have not been capitalised.
Trade creditors
Trade creditors are a popular way of obtaining finance this being obtained by way of goods and services supplied. Generally speaking, trade creditors are unsecured and in the event of a failure, lose most. A look at the statement of affairs of a liquidated company will reveal that it is the creditor who has supplied the majority of the finance.
Secured charges
Where a company's memorandum and articles of association allow, finance may be raised by way of charging its assets. These take the form of debentures, either fixed or floating. A fixed debenture or mortgage debenture is secured on a named asset similar to a mortgage that is secured on one's own house.
A floating debenture is a general charge that until crystallisation does not fix on any property but is a charge on property that is continuously changing such as current assets.
Bank overdrafts are secured (whether or not that security is on the assets of the company or the director's personal guarantees). A distinguishing feature of overdrafts is that they are always shown as a current liability and as such can be called up at any time.
General
Companies may create debentures. Enforcement can be made by the appointment of an Administrative Receiver.