How can entrepreneurs protect their investment in a business?

Starting a business is hard work. In addition to all the planning and hustle, the entrepreneur also needs to invest significant amount of money into the business.

However, if the business fails and enters into liquidation, then entrepreneur is often regarded as an unsecured creditor. This means the entrepreneur is the last person to be repaid from the remaining business assets, ranking behind other secured creditors.

There are a few steps an entrepreneur can take to prevent this from happening, so that the entrepreneur can recover their money ahead of other creditors.

First, the entrepreneur should inject funds into their business in the form of a personal loan to the company.

Second, the entrepreneur must enter into a general security agreement, a GSA, with the company. Under the GSA, the company agrees to provide all of its assets as security for the loan the entrepreneur advanced to the company.

Third, the entrepreneur must record their security interest on the Personal Properties Securities Register, the PPSR.

By doing all of the above, in the event of the liquidation, the entrepreneur’s security interest will rank ahead of most other creditors. This means the company’s remaining assets (including cash) will be distributed to the entrepreneur first.

Although no entrepreneur ever wants to liquidate their business, when the worst happens, a GSA will at least allow you to recover as much money as possible to allow you to continue the fight another day.

If you have any questions about New Zealand commercial law, speak to us at Capstone Law, and we will be happy to assist you.