In case of a limited company owners' losses theoretically would be limited to the amount invested: £500,000 in case of Mrs. Warner and £800,000 in case of Mr. Child. However the lender may ask for their personal guarantee as an additional security. This idea will be explained in more detail in the next section called "Recommendations to BCFS bank". Though the bank may ask for a personal guarantee the main advantage of a limited company is limited liability as business debts may be huge. A partnership has unlimited liability. Partners are personally liable for all business debts which may be far above the amount of money borrowed.
Since time commitments and capital investments of business owners differ, a partnership agreement between them would determine how they would share profits. In the case of a limited company profit would depend on number of shares owned. Even though Mrs. Warner is devoting more time to an enterprise Mr. Child would end up with greater share of dividend (if business is profitable) as he has more personal capital to invest.
The downside of choosing limited company is a more complex process of setting up, legal formalities, administrational costs and lost privacy. So business in Canterbury would need to be registered with the Companies House where a copy of company's report would have to be sent there annually. That would make some financial information available to competitors. Consequently owners of the business in Canterbury would face various administrational costs like hiring an accountant to do the books. Whereas the cost of establishing partnership would be much lower, no registration would be needed and there would be no rules in respect to accounting records or publishing company's information.
However partners would not be able to sign the fixed and floating charge whereas shareholders could. This type of document would be important because it would enable owners of the business to manage their fixed assets without control of the bank unless the business goes into liquidation.
Though partnership has a few advantages Mrs. Warner or Mr. Child as partners might face illness, retirement, withdrawal or death with adverse potential legal and financial consequences. Whereas limited companies would be a separate legal entity from its shareholders and would continue its existence despite death, illness or retirement of one of the owners.
A limited liability partnership (further - Llp) is one more option that customers may want to consider. It is similar to ordinary partnerships but has the following differences: Llp needs to be registered with government organization and exists as a separate legal entity from its owners. So advantage of choosing this business entity is the limited liability. The amount customers may lose is limited to the amount they invested. However for most of people it is much less popular. Mainly it is because Llp has the same downsides as limited company has which were mentioned two paragraphs above.
Recommendations to BCFS bank
This business report has identified three major questions BCFS bank needs to consider: how much money it may lose, who will be liable and how the bank will get its money back in case the business goes into liquidation. According to information provided, the bank has approved £1,000,000 loan for the business in Canterbury. Depending on the business entity chosen by owners, the scope of liability will be different.
In case of forming a partnership Mrs. Warner and Mr. Child will face unlimited liability for all business debts. When customers buy a planned Georgian Town House in the name of the partnership this property will be owned as a group of people. So they will be liable individually and as a group for repaying the loan. The same property brought by a limited company will be registered in the name of limited company because it exists as a separate legal entity. So if business fails Mrs. Warner's liability will be limited to potential loss of £500,000 and Mr. Child's to £800,000.
So how BCFS bank can minimize the risk of not being repaid in the event of business going into liquidation? There a few ways. It is mostly presumable that a £1,000,000 loan will be borrowed in the form of a commercial mortgage. So in case the business defaults the bank will be entitled to sell the Georgian Town House as a direct security. If the value of the property will not be enough to cover the whole £1,000,000 then bank will be entitled to sue the owners of the partnership as their liability is unlimited. Any gap will be recovered by selling customers' private assets chosen by bank as owners of partnership share joint and several liability.
If the commercial mortgage will be provided to a limited company the bank will likely ask Mrs. Warner and Mr. Child as company directors to enter into a personal guarantee. By signing such a document the directors will take personal commitment to repay the loan up to £1,000,000. That means Mrs. Warner and Mr. Child would put at risk their own assets which could be repossessed in case they will not be able to repay the loan. So personal guarantee as well as fixed and floating charge (the idea explained in first section of this report) will be indirect forms of security available to BCFS bank. These together with direct security - Georgian Town House will help to minimize risk BCFS may face. All the three forms of security will serve as the ways for lender to get the money back if business is to default.
However when BCFS bank is concerning the scenario of repossessing owners' private assets (if there is a need to fill the gap of money borrowed and repaid) there are some conditions to be fulfilled. It is important to note that Mrs. Warner and Mr. Child own their properties jointly with married partners. So the bank has to ensure that husband of Mrs. Warner and wife of Mr. Child understand the risk they are taking with their partners who are starting up the business. Only by making sure married partners have signed document saying they have received legal advice from independent solicitor bank will be able to repossess the properties in case of business defaults. Otherwise husband of Mrs. Warner and wife of Mr. Child will claim there was a misrepresentation.
Financial services proposed to business in Canterbury
All the financial services are grouped under 6 headings marked 1 - 6 :
1. Account and accounting services
2. Money transmission/payment services
3. Lending services
4. Savings/investment services
5. Protection services
6. Advisory services
The table below expresses benefits and level of importance of each individual financial service where letter "V" stands for "vital", meaning without having it in place business in Canterbury would not be able manage its activities smoothly. Letter "R" notes that customers may want to consider that particular service although it will mean additional business costs.
Current trends of retail, leisure and tourism sectors
Today the UK's economy is still negatively impacted by credit crunch which began in August 2007. Confederation of British industry expects the recovery for UK in 2010 to be slow, sluggish and remain subdued until the middle of 2011 (BBC, March 2010). So even though Great Britain technically is out of the recession the tourism sector continues to experience difficult times because people have been cutting back on taking holidays in the face of the economic uncertainty. Spending at retail and leisure sectors is reduced too either due to the direct impact of unemployment, or the wider sense of a need to be more financially cautious.
Caroline Bremner global travel and tourism manager at market research group Euromonitor International acknowledged that 2009 was a particularly challenging year. However she expects 2010 to be slightly better (BBC, November, 2009)
The first sign of slow economic recovery that would have a positive impact on tourism retail and leisure sectors is the recent announcement about level of unemployment in UK. The number of unemployed people has fallen for a third month in a row (BBC, March, 2010). Secondly the British pound which has been weakening for the last two years against the euro and against the US dollar (Appendices 1 and 2) makes UK more attractive to European and overseas tourists. Therese Heslop the head of visitor services for Canterbury Cathedral confirmed the presumptions of this report. She certified that number of foreign visitors compared with the same time in 2008 raised significantly (Kentonline, 2009) Moreover the geographical position of Canterbury is another advantage that induces more tourists from Europe to spend weekend in very famous historical town of Great Britain .
Finally more an expensive euro is discouraging big part of Britons from holidays abroad. Evidence of that was the number of visitors at Canterbury Cathedral which soared to record levels during the Spring Bank Holiday weekend in May, 2009 (Kentonline, 2009).
Conclusions
So nevertheless the costs of establishing partnership would be much lower, no registration, no accounting records or publishing company's information is needed, in particular a limited liability company is a better choice for customers. It is mainly because of essence of limited liability, the differences in amount owners personally invest, equity they hold as well as because of need for fixed and floating charge to operate smoothly and be able to continue to develop business operations as a separate legal entity despite the illness, retirement or death of its owners.
From BCFS bank's point of view it would prefer a partnership as the owners choice. It is mainly because of unlimited liability meaning customers would be personally liable for all business debts. Moreover it would be a bank's as main creditors discretion to decide how it will recover the money and who it will sue: one or both partners. To minimize the risk of not being repaid BCFS bank will use the Georgian Town house as a direct security regardless of kind of business entity. By dealing particularly with a limited liability company BCFS bank has to take an additional form of security called personal guarantee from company's directors as well as put in place fixed and floating charge.
This report has investigated a wide range of services which include account and accounting, money transmission services all of which are important for daily business operations. Without bank's Lending services money business development would be much smaller and slower. Investing / saving services are not relevant to business in Canterbury since all the money is invested. Protection services cover various types of insurance policies to minimize the risks and avoid financial consequences. Finally advisory services may help the business improve its effectiveness and profitability.
Finally even though Great Britain technically is out of the recession tourism, retail and leisure sectors continue to experience difficult times because peoples holiday budgets are tight. But weaker GBP against euro or US dollar, induces more Britons to spend holidays in UK and attracts tourist from overseas and Europe. That would make a positive for customers business in Canterbury.
Recommendations
It is important for BCFS bank to ensure that all available securities are valid with legal documents settled. Even though the bank has approved to lend money for customers this report is rising the concern about difficult times for the business to face.
Credible presumptions emerged from the final part of this report which provides evidence of reduced spending in retail, leisure and tourism sectors. Since 50% of turnover is expected from retail part of the business (coffee tea room) and 30% form luxury B&B (which represents tourism aspect) the awareness of customer's relationship manager should be intensified in case business operations start to show the slowdown.
Because of this reason business report underlines the importance of good relationship build with business owners. That would serve as win-win situation. Customers will become loyal, use more and more services, recommend BCFS bank to other potential customers. Meanwhile BCFS bank will know what really is going on in business and may take appropriate measures if necessary.
Appendixes
Appendix 1 (source: )
Appendix 2 (source: )
References
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