There is no doubt in the fact that to ensure the smooth running of the business and to govern the corporate matters, financing is the utmost necessity even for the Hong Kong corporate formation. It is so important that there is no concept of company’s survival in case of inadequate funds or finance. There are broadly two ways to raise finance of the company i.e. either through the proprietors of the company such as shareholders of the company or through the creditors, borrowers or lenders of the company. Share capital and loan transactions may create imbalance in the company and thus there is the need to maintain balance within the interests of different stakeholders of the company such as different classes of company’s shareholders, creditors and the controllers of the company. For instance, in the case of limited company, limited liability privilege of the shareholders shifts the risk factor of the transactions or corporate governance to the creditors of the company. So, to ensure the protection of creditors interests and to maintain the balance within the stakes and interests of all the stakeholders of the company, there is the need for some legal mechanism so as to facilitate and accommodate of all the stakeholders and most of all the protection of creditor’s interest.

Methods to raise Corporate Financing

Stay connected with us, we are pleased to provide material and guideline to solve financing problems of your business and to guide you to get know about the methods of corporate financing for Hong Kong corporate formation such as:

  • The ways through which finance can be raised for the established firms and the start-up companies.
  • How to maintain distinction between the equity and the debt financing and how do they distinguish from each other.
  • What are the types of equity financing?
  • What are the types of debt financing?
  • What are the factors which effect the capital structure of the companies?

These all are the questions which you may be having in mind while forming a company in Hong Kong related to the financing issue of your business. So, let’s start with the source of financing so that you understand the sources through which financing can be arranged and hence, you may not experience any lag or hurdles just due to financing issues in your corporate journey.

Source of Financing

If we look into recent developments in the financing sector, we will end up knowing that finance sector has progressed a lot and there are plenty of financing sources available now along with situation for forming a company in Hong Kong as in past have improved very much. But still there are plenty of private companies which start their corporate journey with very little issued shares and rely majorly on the founders or shareholders of the company along with the banks for debt financing for both permanent capital such as cost of premises or cost of required machinery or other amenities and working capital such as cost to buy raw material to start the production and to run the business cycle which extends to the receipt of payment from the customers or vendors of the company. Previously companies used to rely on the raise of share capital for the expansion of their financial base but now situation has changed, and it is no longer the only way to raise capital and finance of the company. 20th century has revolutionised the financing methods of the company and this revolution led to the state of financial dis-intermediation. So, now companies need not to approach the public capital markets and now they can obtain the private funding equity as per which they are now able to issue share warrants to facilitate the further purchasing of shares and debt mechanisms such as loan stocks, bonds, debentures and the notes are the other ways through companies can expand their financial base. The mechanism of debt is of convertible nature and it can easily be converted to the shares, when required.

For the situation where equity and debt finance are obtained from some public company(s) then it is the legal obligation of the company’s director to ensure that such transaction is in compliance with the Cap. 571 or Securities and Future Ordinance. For the same situation if the acquired shares or securities are admitted to the listing on the local stock exchange then it is necessary that such transactions must be in compliance with the the provisions of “Rules of Hong Kong Stock Exchange on the Securities”.

So wherever revolution has taken over the overall financial paradigm, it is necessary to ensure the security of claims of investors, creditors and other stakeholders so as to prevail the business-friendly environment after paying Hong Kong company formation cost. Hence for the situation where company is willing to provide security to the stakes of its creditors, it is the utmost responsibility of the creditor to carefully assess the situation and to make sure that company should not borrow above its limit and keep borrowing up to the limit where company would be able to service and repay its borrowings.

Financing Sources for the Start-up Companies

There are numerous examples where people and aspirants are afraid of jumping into the corporate world just because of lack of financing. If you are also facing similar problem, don’t afraid and focus on your business model and rest will be handled by us. This section shall guide you fully on how to obtain financing for start-up companies.

Start-up Company

Start-up companies are those which are incorporated whether in sole-proprietorship or in partnership or a company having an entirely new and innovative business model. The initial operations of such companies are either financed by some entrepreneurs or by the immediate families of the incorporator. If due to any reason internally generated funds of the company seems to shrink such as due to the anticipated growth of the business it seems as if present finance would not be enough to cater the business expansion or further business operations then it is mandatory to obtain finance for the business from external sources. Following are some of the external sources through which you can finance your business in Hong Kong.

Financing through Overdrafts and Bank Loans

Bank loans are the most popular and common way to obtain external financing and such loans can be obtained from any financial institutions, from bank, and from any sister company. External financing can be obtained from the holding company if borrower is the part of corporate group. In addition to this, banks are usually ready to provide the facility of overdraft. Overdraft is an attractive facility because it allows the borrower to draw funds beyond the limit of the credit balance but such over drawl of funds would basically be the loan provided by the bank to the account holder or borrower.

Financing through Trade Credit

Financing through the trade credit is basically the short-term financing facility for the small businesses after paying Hong Kong company formation cost. This type of financing arises during the normal operation of the business and there is no need for any formal arrangement to obtain the trade credit. Such type of financing is usually provided by supplier of the goods where supplier extends the time of payment of delivered good to about 30 or 60 days from the date of shipment or delivery. Trade credit is thought to be an unsecure way of financing, but some supplied incorporates the Romalpa Clause in the contract. Romalpa Clause gives protection to the supplier in the way that, supplier reserves the title on the supplied goods till the time full payment of purchased item has not been furnished by the borrower or buyer.

Financing through Business Angels

This is the utmost source of financing aspired by most of the incorporators of the start-up companies. As per this mode of business financing, start-up companies seek first round of equity from the investors and these are the ones who are so called “Business Angels” and inject capital into the small private companies. Such business are usually the friends of the entrepreneurs or some acquittance of the entrepreneurs. They are the contributors of share capital of the start up company. Now you may be thinking that what benefit would they excerpt by injecting capital into the start up company? So, let’s take you to their stakes in providing finance for the company. Basically, in exchange of finance they acquire controlling power of the company in relation to the input they injected in the business capital of the company.

Financing through Venture Capital

For the situation where needs of the firm cannot be fulfilled by the investment of business angels then venture capital firms are their next pit shop and they approach them for their financing needs. Such firms are basically specialised in investing into the equity of start up companies. A venture capital firm constitutes of institutional investors such as insurance companies, mutual funds, unit trusts and is managed and operated by the venture capitalist, who holds the substantial experience in investing into young firms. It is perceived that having a venture capital firm as the investor, can open up great avenues for your young company but such benefit obviously does not come at a very cheap cost. The consequences of having a venture capitalist is that they charge a substantial sum of amount in relation to the profits they generate out of business, in which they invested. Financing through the venture capitalism has the unifying theme and this is because of the fact that capital provided to the young firms or start-up company is the one raised privately, and it is not something which is invested in the public trading companies.

Financing through Equity Crowdfunding

Crowdfunding is the method of financing where finance or capital is asked from the large number of people for a very small amount of money and on account of digital revolution, internet is the most common and popular platform to seek financing for start-up company. Following are some of categories of crowd-funding:

  • Crowdfunding through donation.
  • Crowdfunding through reward.
  • Crowdfunding through equity.
  • Lending on the peer-to-peer basis.

Reward crowdfunding involves the mechanism in which consumers are given the prototype of the product or service and in return consumers make payment prior to the production or development of the product.

Equity crowdfunding provides the mechanism where equity shares of the company is offered to the investor or group of investors. This technique is considered to be the bridging technique as it bridges the gap between the financing raised from the stock market and the financing obtained from friends, immediate families, entrepreneurs and acquittance. Equity crowdfunding is very anticipated on the basis of the argument which sees it as the platform to bridge the capital shortage for the start-up companies, but it provides savers with the opportunity to bear high risk but enjoy high return investment. Hence, it can legitimately be called the “high risk high return investment”. However, due to the regulatory challenged equity crowdfunding is not much welcomed in Hong Kong.

There is the need to regulate the method of financing through crowdfunding because it involves high probability of risk and thus on account of this risk and to let market fully reap the benefits and perks of crowdfunding and to save it from any fraud or abuse, regulatory monitoring and evaluation is mandatory. The suggested regulations related to the equity crowdfunding includes, regulations for the:

  • Investor.
  • Issuer.
  • Platform.

There are various countries who have enacted rules and regulations regarding equity crowdfunding. However, situation in Hong Kong is at preliminary stage and Hong Kong Financial Services Development Council has put forward the proposal regarding rules and regulations.