daniel chigunwe
Godknows Hofisi
Many times businesspeople without adequate funding seek loans from financial institutions, friends, or relatives.
Some may invite those with finance to join them as joint venture partners or even as shareholders in the case of a company. In this article, I compare loan finance versus a joint venture.
Loan finance
The following are the key characteristics of a loan:
A borrower approaches someone with funding for an advance usually in the form of a loan. Borrowings in the case of financial institutions can be in the form of an overdraft or other instruments.
Upon agreeing the parties sign a loan agreement for the terms and conditions.
The loan is disbursed upon signing of the loan agreement or in accordance with drawdown terms and conditions as agreed between the borrower and the lender.
The borrower pays interest at an agreed interest rate which may be fixed or variable, for example, 15 percent per annum, on the principal or loan amount.
The lender is not involved in the management of the business of the borrower.
However, some agreements allow the lender to monitor the business of the borrower as a way of protecting the funds loaned. Monitoring may involve regularly assessing the business of the borrower, requesting certain performance information such as operational reports, management reports such as management accounts, audited financial statements, and so on.
The lender may require security for example in the form of immovable property. Some individual lenders may accept motor vehicles or other assets as security.
Loan agreements are normally very strict in the event of default. For example, in the event of default, the lender may require that the full outstanding amount be settled or he or she may resort to the asset pledged as security.
At the end of the loan period the lender would have been paid the principal amount loaned plus interest for the period.
Joint venture
The following are the salient features of a joint venture agreement:
Parties come together to jointly carry on a defined or agreed business for an agreed period.
One party may contribute facilities required to run the business such as a factory, management of the joint venture affairs or markets, etc. The other joint venture partner will be the financier and will inject funds into the joint venture.
Instead of interest there is a profit share. Normally profit share is defined as a percentage of profit made or realised. Occasionally some financiers may demand to be paid a profit share in the form of a fixed amount, especially if they do not want to be involved in the management of the joint venture or they want to be assured of a certain level of return.
A financier may or may not actively participate in the management of the business.
The financier does not normally require security if he or she is involved in the management of the joint venture enterprise. However, it is possible for a financier who is risk-averse and wants to secure the funds injected to require security.
This may happen if there is the risk of the other joint venture partner diverting or misusing the joint venture funds. The asset pledged as security may be that of the other joint venture partner or the joint venture itself if it is a legal entity.
Joint venture agreements may not be as strict as loan agreements and parties may have the chance to engage each other for variations or extensions.
Depending on the agreement, upon dissolution of the joint venture the financier may get back his or her contribution.
Choice between loan
and joint venture
The factors explained above will influence whether one goes for a loan or a joint venture. It is possible to come up with a hybrid structure.
Conclusion
Loan or joint venture finance is common in business. One needs to have a good appreciation of them. Security is normally in the form of immovable property but some individual lenders may accept motor vehicles as security.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot-Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience in industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity./He can be contacted on +263 772 246 900 or [email protected]
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