Shareholder Loans at risk?
Shareholder loans are one of the most common methods of funding new businesses. Most new start-ups and smaller companies lack sufficient Cashflow to support day to day operations, so the owners are constantly moving their personal funds into and out of the business to keep it afloat. Unfortunately, most of these loans are usually undocumented and poorly tracked given that most business owners are too busy focusing on the generation of income.
At Jewell Moore our recommendation would be to record the shareholder loans in writing at the outset. You need to consider whether you will be charging interest. Two points above the prime rate is generally considered to be an acceptable rule of thumb. Sign the document twice if you are the only shareholder. Once as the borrower and secondly as the lender.
We further suggest that you consider securing your shareholder loans. Jewell Moore is able to assist you with registering your personal interest with the PPSR. The PPSR (Personal Property Security Register) is an online register of all personal property that has security interests registered against it. In the event that there is a claim against your company or business, if your shareholder interest is registered first on the PPSR, then you would have certain rights to repayment of your shareholder loans as a secured creditor. In the event of a liquidation, secured creditors generally rank before unsecured creditors for any distributions.
Are you providing goods under consignment or Hire Purchase and if so, how are you protected?
How can you protect your interest as a secured creditor?
A secured creditor will have priority over an unsecured creditor so the best way to protect your security interest as a creditor is by registering the interest in the PPSR, especially if your business:
- Includes retention of title clauses in their sale agreements
- Manufactures goods for others or provides raw materials that are then processed or assembled as part of another product
- Provides goods under hire-purchase agreements or consignment
- leases or bails goods, or
- Grants licences to others to use their products, trademarks and other intellectual property – for example, software licences.
For most security interests, the time at which they are registered affects priority, so you should consider registering your interest early.
You can also search the PPSR, at a fee, for any other security interests that may have been taken over assets of the company to which you are providing credit or goods and services.
If you intend to provide goods and /or services without being paid first. Consider whether you need to protect yourself against default on payment, or the company going into liquidation.
You can enter an agreement to secure your interests against the property of the company or business. If you have an agreement to secure your interest, this will assist in tracing any claim you may have to the personal property of the company, and ensure that you are counted among the secured creditors if the company goes into liquidation. By the same token, if you have supplied goods or services and have not secured an interest, you are an unsecured creditor and are potentially at risk.
Contact us if you’d like further information about protecting your assets…
