Start-Ups/Borrowing Costs/Tax Issues

with No Comments
A perennial dilemma for all new start-ups. Your question really boils down to the best and most efficient way to borrow (when funds are in short supply) and without personal liability.
You are not yet a client and so you need to come and see me so that we can firm things. There is a procedure I must follow to complete this and I will go through this with you in my next email.
Also, as a qualified accountant I must be careful on the specific advice I give as I am not aware of you and your partner’s financial circumstances. Also, without being a client I can only give you limited advice because at some stage I must charge for my services.
Limited Company
If borrowing from a Bank it will require both cash flow statements (impressively provided using the classic logic “if” function. However, I feel that if you approach a Bank (-please advise if you have) then it will also want a budgeted profit and loss account (different to a cash flow in that it is drawn on an accruals basis and not a cash basis) with balance sheets.
The problem here is that the Banks drive you mad before lending you anything (contrast this with lending to Ireland (£80,000 billion, I think.)) it is my opinion that there are far better ways for you to borrow money, I really do believe this.
Additionally, if borrowing through a limited company it is true that you have limited liability and so the company itself would not be liable for the debts should the business not succeed. However, Banks are not stupid and you must be prepared for them at the latter stages only of assessing the loan (not the beginning) will request some collateral and you should both be satisfied that you have this available. If you either have nil collateral or do not wish to commit your personal assets then again I believe there are better ways for you to borrow funds. However, it depends on your precise borrowing requirements and over what period you intend to repay and so please let me know.
The business must be seen to make tax adjusted losses but these can be offset against other paye income (yours too.) I have completed this procedure for many other clients.
However, the business must be seen to be trading. It is more difficult to prove if there is nil turnover and it is better if actual trading takes place otherwise it can be viewed by HMRC as an investment (not tax deductible).
Simply keep all your invoices and the day your first sales begin the expenditure made against invoices (not investment only as this may be reflected only in money put into a bank account) will be imputed as expended on the first day of trade. If you are clever and choose the correct accounting date then tax adjusted losses can be generated (please note that this is legitimate tax planning and not fraudulent-an important distinction.)
One point that you have not mentioned is vat. This product should be sold with vat and so at the time you begin trading you must register for vat and so reclaim the vat expended since the start of the project (you can always go back a maximum of seven years.) This will give you both an immediate cash flow inflow (sounds good, you must agree).
An excellent idea to trade first as a partnership (you will have personal liability but there are better ways of borrowing than your research has so far revealed) as it is my opinion that the Banks will at the end of the day demand collateral.  If still unsure make this a point before completing any application form for funding. Losses of a limited company can only be carried forward and set against future profits and so in a start-yup situation is a real disincentive to trade this way at the beginning.
I hope that this all helps and hope to hear from you again quite soon with a meeting date.

Leave a Reply