Can a company borrow money?
Companies borrow money from a range of sources, including their directors and shareholders, personal contacts, banks, venture capital companies, institutional investors and the public at large on the Stock Exchange.
There are no particular statutory requirements except that charges to secure
such borrowing must be registered at Companies House (see related topic: How
is a debenture registered?).
Many companies borrow from their directors and shareholders, either formally,
perhaps granting them a debenture (see related topic: What
is a debenture?), or informally, with just book-keeping records, such as
a director's loan account. Lending money or assets to the company can be an
alternative to putting it in as share capital (see related topic: How
many shares should a company have?).
If a private company borrows from its bank, the bank will probably require
the directors to give personal guarantees of the debt and, depending on the
amount, may want security over the company's assets, or perhaps other property,
such as second mortgages on the directors' homes. Security over the company's
assets is usually in the form of an 'all-monies' debenture, secured with fixed
and floating charges over all the company's assets. Once signed, this will cover
all future arrangements the bank makes with the company - overdraft facilities,
loans for specific purposes, etc. In most cases, the terms are for repayment
on demand, and any default will allow the bank to claim from the directors immediately
on default by the company if they have given personal guarantees.
Borrowing from venture capital companies and, sometimes, from other financial institutions, is often part of a larger finance package involving shares and loans.
Borrowing through the Stock Exchange is where a public company issues debenture stock (or loan stock - sometimes the term 'bond' is used) through the Exchange. The loan fund is divided into units (e.g. £1) and sold through the Exchange in the same way as shares are sold. The stock may be redeemable at a fixed date, or at the company's option, or even without the expectation of redemption (the investors can sell the stock through the Stock Exchange) and will carry interest. Trustees will be appointed to protect the interests of the lenders.
In most cases of borrowing a debenture is issued. A debenture is the traditional
name given to a loan agreement where the borrower is a company. See related
topic: What is a debenture?.
Related topics
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