Financing Methods for the Established Businesses having Hong Kong Business Registry


It is not an absolute understanding that only the new start up companies or the business aspirants would need the finance to jump into corporate world. Situation may arise where the established firms after getting business registration certificate Hong Kong would also need to look for the financing options to continue their corporate journey. For example, consider the situation where the established business sees the market niche and to enter into this new business model they need external financing as company’s returns and capital is not enough to start this business expansion so as to fully exploit the market niche. So now we shall take you onto the journey where you will find the financing options for your on-going business and let you discover the capital gap to undertake your business expansion intentions.

Financing through Retained Profits

This is basically the internal methods to raise finance and this method governs through the retained profits of the firm, after getting business registration certificate Hong Kong. Whenever the company is in need for capital then company can acquire them by capitalising complete or part of its profits, but this way is only limited to the situation where company has acquired some profits and business is streaming as being profitable. However, if company is not profitable then obviously it would not be able to adopt this way of capital raising. Financing through the method of retained profits is very common among listed companies in the stock exchange to raise the capital. Listed companies raise capital by paying dividends to the shareholders in the form of the bonus shares rather than conventional cash-payments.

Financing through the short term Method

Instead of looking for external sources of financing such as financing through business angels or through venture capitalism, there are plenty of public and private sources of debt and equity financing are available, thus company could acquire them to meet their capital needs after setting up a business in HK. Private sources of debt finance include the provision of bank loans secured with numerous security types such as commercial papers or through the promissory notes. Secured methods of short-term financing or in other words secured quasi methods of financing includes the methods of receivable financing and method of stock financing. Now you may be thinking that what methods does receivable financing would include? Basically, provision of invoice finance or debtor finance is what implies towards the method of receivable financing. Let’s shed some more light on the method of receivable finance, stock financing and commercial paper as short term financing is what most of the businesses desire for, so that business cycle keeps on continuing.

Receivable Financing

Meeting the short-term financing needs through method of receivable financing includes the way of finance through invoice or via debtor finance. This method includes the raising of finance through company’s receivables such as any debts or any other monetary obligations of the company. If we look into the legality of it then one can see that there are two methods to do so. By the first way, debts owing to the company can be used as the security for the loan(s) provided by the lender while the second way suggests of the path as per which sale transactions can amount to the outright assignments of debts. It is important to understand that whether the involved transactions constitute secured loans or sale because the company which grants security upon its debt book, is under the legal and statutory obligation to register such charge. The sale of receivable would be considered as the way through which receivables are being sell for the sake of security and thus, this shall amount to the commercial functionality of the matter. But court keeps itself at distance from this approach and says that if after setting up a business in HK the extent of transaction involves transaction seems to be one amounting to sale then it will be considered to be sale transaction rather than the transactions, went in for the sake of security.

In addition to this, factoring is another type of receivable financing to raise capital and it is defined as:

Factoring is the type of transaction as per which the person supplying the goods or products to the client/customer on the terms of trade credit, assigns the receivables from this trade to another who is known as “factor”. All this will be done by agreeing to the terms as per which debtor is notified about this arrangement and factor shall be supposed to collect the receivables directly and shall bear all the responsibility to maintain accounts and upon some terms he/she shall also bear the risk of default by any client/customer.

In this context, client or customer would basically be a company and if factor does not want to bear the burden of company’s debtor then such transaction will be done on the recourse basis. This mean that on the recourse basis of transaction, factor will have the right to repurchase the debts which are being defaulted or has been defaulted and such repurchasing will be done by the company. Now you may be thinking that how factor would make ways for his/her profits and from where financial prosperity of the factor would be excerpted? So, basically company would sale the company’s receivables to the factor at discounted rates and when factor will further sale it then this discount factor would be the one which shall determine the profit of the factor.

For the situation where transaction is being carried without the notification to the debtors of the company about any assignment then such transaction would be called as “Invoice Discounting”. In such sort of transactions, debtors of the company would not know the third parties involved in the transaction and thus company would have full control over its ledger administrators or more generally, the debtors of the company.

Stock Financing

If stock financing is to be used as the method of financing after the Hong Kong corporation registration then it will involve the way through which financer would provide firm with the capital against the purchase of stock and this is due to the reason that; financer wants to park the firm to the agreement till the time, acquisition of finance and the sale of stocks gets tide up. For instance, consider the situation where the automobile dealer does not have the enough capital to purchase cars, so he adopt the stock financing to purchase cars. In this method, lending or borrowing up of finance is supported and secured with the stocks of the company. However, value of company’s stock as a security to borrow depends on certain facts such as the quality, marketability, perishability and the age of the company’s inventory.

Commercial Paper

Raising finance through the commercial paper is the popular and common method amongst the large. Large companies prefer short term financing through the commercial paper. You may be wondering that what does this word “commercial paper” implies? Commercial paper is a sort of money market instrument with the maturity period of less than one year or 12 months. The issuer borrows or lends on the commercial paper and hand it over to the person, lending to issuer. Holder of commercial paper is entitled to make issuer liable for repayment. Commercial paper is usually issued as the interest-bearing or at discount value and is issued in the form of a promissory notes, that are payable to the bearer.

Financing through long term Method

While short term loan is common one but there can be the situations where any established firm after the Hong Kong corporation registration need the long-term financing to accomplish their aspirations. Following are some of the ways through which long term financing can be obtained:

Revolving Credit Line and Term Loans

These are two different terminologies so let’s elaborate them separately.

Resolving Credit Line involves the financing mode where agreement is carried out with the bank to lend some specific sum of money for the particular time and once repayment is made, then facility of re-borrowing shall automatically be made available. Line credit shall be called an “asset-backed line of credit” if company is willing to declare an asset as collateral to secure larger credit lines.

Term Loans are provided for the fixed period of time and thus repayment needs to be made within the specific time period. For the situation where the required sum of amount is large then such large loans could be provided by the group of banks and thus such loans would be known as syndicated bank loans.

Leasing

Leasing is the way through which finance is provided to acquire certain assets such as furniture, motor vehicles, IT or office equipment’s, any manufacturing or construction plants. Hire-purchase agreement is the most common way of leasing in the commerce sector. As per the hire-purchase agreement, financial institution purchases certain equipment and lease it to the customer, also known as the lessee, for certain time period. At the end of lease period, ownership of the leased asset is transferred to the lessee upon the full payment of outstanding balance. If we look on to the legal and corporate perspective of it then we shall find that hire-purchase agreement is analogous to the credit sale because in both these settings, the acquirer is given the asset for immediate use but allowed to make payment through instalments. But legal commentators and corporate gurus comment that; hire-purchase agreement is different to them as in this agreement, acquirer do not get the immediate ownership of the asset and ownership transferred upon the end of term and upon payment of outstanding, which is on contrary, not the case in credit sales agreement.

Project Financing

In this mode of long-term financing, a financer will finance the particular economic unit of the project and will ascertain the cash flows and the earnings of this economic unit to ensure that economic indicators are well enough to be able to repay the finance provided by the financer. For example consider the situation where xyz industrial company enter into the project financing deal to finance the building and operations of projects for the subsidiary.

There is the difference between the corporate financing and the project financing. The key difference is that; project financer does not look at the balance sheet of the company and focus solely on the signal unit or the unit(s) he/she is financing. Such type of financing is usually visible in the resource financing projects such as oil pipeline or in infrastructure projects such as roads, hospitals, power stations etc.

Private Placements

Provision of finance through the private debt placement is different from the public market as it involves the issue of bond to the small number of investors. There is the observation that lending through the private placement is thought to be less costly than the bonds issued publicly because publicly issued bonds would include the regulatory cost.

Right Issues

Right issue is another method to raise capital of the company. This method includes the offering of new shares to the existing shareholders of the company, in relation to their existing holdings or standing in the company. In the case of a renounceable right issues, the shareholders who do not want to buy the new offered shares then they may sell their entitled offered shares to be bought by someone else, who will then proceed to obtain these offered shares. But if offered shares are non-renounceable then the offered rights would be considered to be lapsed if the existing shareholder of the company do not subscribe to the offered shares.

Publicly Issued debts

Debentures corporate bonds and notes takes the form of publicly issued debts and company can raise finances for the long term by making them available to the public. Anyone holding these debt instruments, shall considered to be the creditor of the company and thus he/she shall be entitled to the periodical payments of the interests and the repayment of the face value of the issued instruments, once it reaches the maturity.

Initial Public Offerings

It is possible that the owner of the firm may want to raise long term finances of the company by making the company from a private firm to the public firm. It not only would enable the owners to diversify the business of the company but will also enhance the general reputation and prestige of the company. The process for going public is termed as IPO (Initial Public Offering) where the share capital of the company is opened up for general public.