Avoiding the financial blunders of small businesses

By Vida Denning

Starting a new business can be an extremely exciting and daunting adventure to take up. The world is your entrepreneurial oyster and like all small businesses, the owners dream of world domination and financial freedom. It is possible. The world domination may not be as achievable as owners of small businesses may believe, but with some savvy financial education funding for small businesses can be achieved, however there are several mistakes that should be avoided to ensure long-term business and financial stress are kept at bay.

Credit too early

Using your business as leverage against your credit card way too early is detrimental to the future of your small business and is one of the key reasons for it going under. Using your credit card to fund your business means you are paying almost double for putting your product out there. Interest charges eat into any profits and additional funds you may bring in, and you eventually end up feeding a monster. Avoid this by putting any profit you make, back into the business and fund it from the businesses money, as opposed to a credit card which is not building your business but rather eating away at any future profits.

Credit rating

All small businesses are represented largely by their credit ratings. The funding and credit you apply for as a small business owner, will only be granted once your credit rating is determined and if it’s negative, your business will suffer for it. Avoid this kind of negativity by keep an eye on your personal and company credit rating. If small businesses want to grow they need to ensure their ratings are positive as that can be the fine line between success and failure if you desperately need the finances to take on a big project.

Safeguard credit documents

Many small businesses have been victims of fraud by employees or unscrupulous people. Ensure you keep all your business documentation in a private space away from prying eyes. It’s easy enough for someone to apply for credit on the business name if they have access to enough information which is gleaned easily from documents left lying around.

Pay attention to the fine details

Accounting for small businesses can be a painful experience, but it’s a large part of the backbone of any small business. Hiring a bookkeeper can also be helpful, but that doesn’t mean you shouldn’t be involved. Small details such as interest on credit cards for small businesses are fine details that can ultimately cost you a big fortune if you don’t take notice of it. Bookkeepers will help you stay on top of these little details while helping you keep your financial house in order.

As a prolific freelance writer Vida Denning has had to deal with her fair share of small businesses as she freelanced for a few at a new office space in Miami and San Francisco. She learned quite a lot about funding for small businesses.

How floating charges are assessed

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Floating charge loans are secured by assets that have no fixed worth. An example of a floating charge is a corporate debenture which is an asset secured loan. Moreover, the assets that can be used to secure a debenture can include stocks, depreciable equipment and goodwill. No specific asset must be used to secure a floating charge, however the value of business assets should be high enough to pay for the loan if liquidated. 

In order for floating charge business loans to be redeemed by the lender either the loan is paid back by the borrower or in the case of default, the lender can appropriate assets owned by the borrowing company. This right of acquisition allows the secured assets to become what is referred to as 'crystalized' to exchange the debt from the loan according to the North Carolina Banking Institute. In other words, the crystallization of secured assets in a floating charge means the loan becomes a fixed charge loan due to non-payment under the conditions of the floating charge.

The reasons why floating charge loans have a transformative structure is due to the terms of agreement. Moreover, also per the North Carolina Banking Institute, although these types of loans are secured, the asset securities remain in the borrower's possession. The lender only has limited rights to the assets allowing the debtor company the freedom to do as it pleases with the assets so long as the loan is paid in accordance with the floating rate charge. Moreover, upon liquidation of assets, floating charge loans are subordinate to fixed charge and loans where control of assets rests with the lender.

Legal definitions of floating charge loans are shaped in part by judicial rulings; consequently they can have similarities and differences across national jurisdictions. Right to assets is an example of a similarity between legal definition of floating charge loans in both the United States and the United Kingdom. Moreover, under normal business conditions floating charge business loans do not require the borrower to obtain consent of the lender before selling secured assets. 

An area of meaning where a difference between the definition of floating charge loans is in how clearly the underlying assets are defined. For example, according to Freshfields Bruckhaus Deringer LLP, in the United Kingdom floating charge assets have legal precedence requiring them to be tangible via control and possession under Financial Collateral Arrangements Regulations. However, In the United States intangible assets are more likely to be considered as acceptable within a floating charge loan depending on how clearly the definition of an asset with changing value is defined.

Even though floating charge loans are secured and give lenders the right to assets and cash from sale of those assets, they are higher risk than secured loans where assets change hands. Moreover, since the floating charge loan is structured differently, it gives the lender lower priority over assets in the event of a company liquidation per the North Carolina Banking Institute. For this reason, when making floating charge loans, the ability of a borrower to remain solvent is significantly associated with the risk of that loan.