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Increase Share Capital Loan Agreement

Essay by   •  July 12, 2012  •  Essay  •  324 Words (2 Pages)  •  1,830 Views

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The issue our company is facing is to decide whether to increase the share capital or to sign a loan contract with the shareholder in order to finance the investing activity. In the table below we try to show the decision criteria - pros and cons - for each alternative, from different perspectives: administrative, time consuming, taxes, financial implications:

Increase share capital Loan agreement

PROs

* Recapitalization of the company;

* Improve financial position and credibility of third parties-possible creditors;

* In case the shareholder is a non-resident legal person and there is a treaty for avoiding double taxation with the country of the shareholder, the most favorable taxation for dividends applies; * Reimbursements are allowed at any time, provided that the company has available cash;

* The loan can be guaranteed;

* Short and easy procedure, flexible terms of the contract;

* In case of insolvency the creditors are the second ones, after the state, to recover their debts;

* The creditor can receive interest for the loan, provided that his jurisdiction allows him to do so.

* It is not a public information that can hint to financial problems of the company;

CONs

* Delay in receiving dividends;

* In case of bankruptcy, the shareholders are the last to recover their capital;

* Difficult procedures and high costs with the Trade Register and "Monitorul Oficial";

* Possible approval requirements from other creditors of the company (banks); * Increase leverage ratios;

* If the loan has a duration of more than one year and the shareholder is not a resident, there is the obligation to register the contract to the National Bank of Romania, for foreign debt purposes;

In conclusion, whenever a company has to take a decision regarding the mix of financing sources, a thorough analysis is advisable, taking into consideration all possible alternatives for raising capital, what jurisdictions are involved in the transaction, what company and fiscal laws apply- taxes on interest, dividends, capital gain, what are the intentions of the shareholders on short, medium and long run with respect of the company, what are their expectations in terms of recovering their investment.

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