What Is Commercial Benefit?
There is actually a real conflict of interest these days when it comes to Commercial Benefit. I will explain why shortly.
The definition of Commercial Benefit can be seen as;
“any benefit that comes about as a result of the directors acting for the good of the company, which reflect positively on the company in the wider, commercial world”
The Companies Act of 2006 stipulates that directors can be held personally responsible for their decisions in their capacity as a director. To that end the decisions they make must be to the benefit of the company as a whole rather than themselves personally.
The term Commercial Benefit is often used when it comes to raising finance in that the purpose for the company taking on borrowing must first be to benefit the company, not the director’s own interest.
Historically one of the most common reasons Commercial Benefit was questioned was when a business wanted to purchase it’s own shares, such as when buying out a shareholder or borrowing to finance the enforcement of a Cross-Option agreement. You could also question a company for paying to obtain a valuation of it’s own worth, who is that valuation for etc?
The Commercial Benefit Conundrum
Earlier I mentioned that the issue of Commercial Benefit is becoming more conflicted. The biggest example of this is with Corporate and Social Responsibility (CSR). CSR is all about the impact of the company in the wider world, this encompasses charitable, environmental, social and ethical responsibilities.
CSR is a well established policy, every major company has a CSR policy and most small companies have one also, even if it is not necessarily written down.
If you take CSR a step further then you start to get conflicts, think about;
- A company moving suppliers to a more expensive and less quality product because the supplier uses low carbon vehicles for their deliveries
- Allowing a local charity to use your warehouse for free, you pick up the costs but would rather let the charity use your warehouse then let the space commercially
Both these are good CSR practices. However, does the company benefit? It would be easy to argue that there is no ‘Commercial Benefit’ and therefore should not be something the company should be doing. In reality, it is good moral practice and something I would be happy to support.
Commercial Benefit In The Real World
Commercial Benefit can sometimes be easy to see as can a lack of benefit be easy to spot. For everything else there is a shade of light grey.
There are normally 6 factors that determine Commercial Benefit;
- The consequences of any decision in the long term interest of the company
- The interests of the company’s employees and labour force
- The need to foster business relationships with suppliers, customers and other parties
- The impact of the company’s operations on the community, environment and other parties
- Maintaining a reputation for high standards of business conduct or conduct in line with the brand
- To act fairly to suppliers, customers and the community
For everything that falls outside these 6 factors it comes down to justification. Bear in mind that the call on whether it is justifiable will come from an impartial third party should dispute arise, then directors should be comfortable that the underlying benefit is for the business not themselves.
Commercial Benefit & Borrowing
When it comes to borrowing or raising finance then it is important for the purpose of the borrowing to be in the company’s interest first and foremost. Ultimately the benefit will feed through to the shareholders and directors, however the justification for the company taking on borrowing needs to cover at least some of these three bases;
- To grow or potentially increase the company’s profits
- To improve the future potential of the business by reducing costs elsewhere
- To otherwise improve the business
The most common reason that Commercial Benefit arises during borrowing is where an acquisition is taking place or director’s borrowings are being refinanced. In both these cases it is worth clarifying with your accountant as to whether commercial benefit can be justified.
For everything else, so they say, there’s Mastercard…
If you have any questions about how commercial benefit may impact on your plans to borrow, or you have any comments on this post then please add them above or contact us.
By Dave Farmer