In Hong Kong, a loan can be given by an authorized money lender or a bank. Borrowing money from a financial institution which is not a bank is governed by the Money Lending Ordinance (MLO), whereas a bank loan is governed by the Code of Banking Practice (Code). Both regulations set out how money lenders should conduct their business. And they have different restrictions on how much interest a lender can charge. Maximum interest rate (Short answer) Non-bank money lenders60% per annumBanksNil The relevant regulations will be further explained below. How to calculate the true rate of interest? As it is important to find out whether a lender has charged an unfair or illegal interest rate, both borrower and lender should understand how the true annual percentage rate of interest is calculated, and should not take whatever interest rate is on the leaflet, brochure, or even the contract itself. Generally, the formula to calculate an interest rate is as follow: Annual interest rate= Total interest payments over a year/Loan principal amount x 100% Example A borrowed HK$100,000 from B and intended to repay B Co. over a 12 months period with the terms below: Loan Amount: HK$100,000Repayment Period: 12 monthsRepayment Instalment: 12 %/ HK$12,000 per monthFees and expenses: 5,000 The interest payment usually also includes the fees and expenses in the calculation. So the calculation should be as follows: Annual interest rate= Total interest payments over a year/Loan principal amount x 100% =$12,000 x 12+$5000$100,000 x 100% = 49% per annum Authorized money lender (not a bank) An authorized money lender means a money lender who has obtained a license from the Registrar of Money Lenders. It is a criminal offence to operate as a money lender without a license. Therefore, a borrower should be advised to confirm whether the lender has obtained the appropriate license. Maximum Interest Rate: The MLO sets out the maximum

One of the main reasons people set up a private limited company is to limit their liability for business debt. The principle of separate legal entity of a company means that the right and liability of a company are separate from those of its directors. However, that does not mean that directors are free to do whatever they want. This Q&A aims to identify the certain events where a director can be held personally liable for the business’s debt. Directors’ duties under Hong Kong laws Directors are in charge of the management of the company. They make operational decisions of the business and are responsible for making sure that the company will meet all its obligations. There are 3 major sources of law in Hong Kong which set out the duties and liabilities of directors: Common Law: This is where most of the director’s duties originated. It includes the duties to act in good faith, to avoid conflict of interest, to use power for proper purpose etc. The Company Ordinance (Cap.622): It specifies the duty of care, skill and diligence. In deciding whether a director has breached the duty, both the general knowledge expected of a director (the objective condition) and the specific skill and knowledge of that particular director (the subjective condition) must be considered. Other Hong Kong Legislation: There are also other legislations including the other Company Ordinance (Cap.32) which regulate the director’s conducts immediately before company’s liquidation. There is also the MPF scheme in Hong Kong which holds directors who fail to enroll employees in an MPF scheme liable. To briefly summarize, here are some of the major directors’ duties in Hong Kong: Duty to act in good faith Duty conflict of interest Duty to exercise care, skill and due diligenceDuty to use power for proper purpose Duty to obey the company’s law Duty not to delegate power except with proper authorization and exercise independent judgement So, In what

Although a shareholder is not generally held personally liable for the company’s debt, you should make sure you are aware of them so that you do not fall into a situation where this could happen. Limited liability of shareholders In Hong Kong, limited liability means when the shareholder’s liability is limited to a fixed amount, most commonly the value of a shareholder’s investment in the business. A limited liability company can be incorporated in Hong Kong by registering with the Companies Registry under the Companies Ordinance (Cap.622). A Company will then become a separate legal entity which means that the right and liability of the company are separate from those of its directors and shareholders. Although companies can be either limited or unlimited, the preferred choice for most small business founders in Hong Kong is to set up a limited company as the liabilities of the owners of the business will be limited to whatever they invested in the company. The owner’s personal assets will also be protected from business liabilities. Shareholder’s liability in a company limited by shares A limited company limited by shares is one in which the shareholdings do not attach to any shareholders of the company. It is also the most sought after form of company in Hong Kong. The liability of shareholders is limited to the nominal value of the shares they hold in the business. For example, A shareholder holds 10 shares with a nominal value of HK$1, his financial liability is capped at HK$10 if the company fails to pay its own debts. Exceptions Despite the idea of limited liability, there are still circumstances where shareholders can be responsible for company debt: 1. Personal guarantee by the shareholder If the shareholder has given a personal guarantee for the company loan, and if the company fails to make repayment plus interest when due, the shareholder will assume personal liability to pay the outstanding amount. Please

In a transaction, a party (often the seller) may require some form of guarantee in case the other party fails to make payment or is a limited company and its creditworthiness is unknown. The party who provides the guarantee is the “guarantor”, also known as “surety” of the transactions. Hong Kong does not have a specific set of rules or ordinance governing the operation of a guarantee. Parties are generally free to agree using a guarantee agreement and the general rules of contract interpretation apply when deciding the meaning of the guarantee contract. Terminology Creditor - party taking benefit of guarantee Debtor - party whose obligations are being guaranteed Guarantor (or surety) - the party guaranteeing the obligations of the debtor Personal guarantee A personal guarantee means that a guarantor promises to repay the loan taken out by another individual or a company (the debtor). To simply put, when the debtor for any reason fails to repay the loan, the guarantor will assume responsibility to pay whatever is due. ProsConsEasier for the start-up company to get the loan Better lending terms might be given by the money lenderIn the worst case, a guarantor will be liable to pay the huge debt The personal liability might potentially bankrupt the guarantor Example Co. A (Debtor) has taken out a 1 million loan from Bank B (Creditor). Because Co. A is a limited company, even when Co. A fails to repay the loan, the directors and the shareholders will not be personally liable for the debt of the company. Because of that, Bank B requires Mr. C, (being the director of Co. A) (Guarantor) to sign a personal guarantee of payment. So if Co. A fails to pay the 1 million plus interest in full at maturity, Mr. C will assume personal liability to pay the outstanding amount. Please be reminded that, as a personal guarantor, it will be difficult for you to avoid liability from the guarantee unless you have solid evidence proving

Start-ups in Hong Kong can use debt financing to raise funds for their companies. Debt financing means when a company borrows money to be paid back at a later date. This is a good way for young businesses who want to raise funds and also maintain control over their company in Hong Kong. Debt financing is usually adequate for SME that need a significant amount of capital quickly for business growth. This Q&A aims to identify the most common types of debt financing in Hong Kong so you can pick the right ones for your business. 1. Loans from family and friends Friends and family are usually the first source of financing for many young businesses. The upside of such loans is that they are usually interest-free and much easier to secure. However, companies must carefully assess the risk of borrowing from family and friends as this might pose an adverse effect on one’s personal relationships if things go south. 2. Loans A start-up can obtain a loan from a bank or any qualified money lender. Lenders will often assess the corporate financial situation and lend money accordingly. There are a number of ways that a bank can go about lending money to businesses: Installment loans: This is the most common type of bank loan in Hong Kong. If a company takes out an installment loan from a bank, it will receive a lump-sum payment from the bank upfront. Then the company has to make regular payments (monthly or annually) to the bank until the loan has been fully repaid. Term loans and small business loans are examples of instalment loans. Check out our guide on What do I need to know about Small Business Loans? Revolving loans: Instead of the bank giving you a lump sum right at the start, a revolving loan gives you access to a facility of credit that the company can draw down from. Unlike an installment loan, the amount repaid will become available for withdrawal again. Cash flow loans: A cash flow is a type of unsecured loan that is used for daily

A Small Business Loan, also known as a SBA Loan, is a fixed amount of funding given to a small business in exchange for repayment of the loan principal amount plus interest. A Small Business Loan can be offered by a bank or a qualified money lender and can be used by small businesses for various business purposes such as equipment or vehicle purchases, operating expenses or raising cash flow. Like regular loans, the amount of funding available and the interest rate are dependent upon the credibility of the company. Strengths and weaknesses of Small Business Loan ProsConsLow interest ratesFlexible repayment termsLower down paymentsNo collateral is generally neededSmaller amounts compared to regular bank loan Longer approval processDecent credit score often required Small business loan vs Conventional bank loan Similarities: Credit Score: For both small business loans and conventional loans, the amount of funding available and the interest rate are dependent upon the credibility of the company. With more solid financials, a company can expect to obtain a bigger loan with a lower interest rate. Obligations: Both SBA loan and traditional bank loan offer flexible repayment terms. Differences: Target borrowers: Apparently, only small businesses are eligible to SBA Loans, whereas conventional bank loans are available to all companies. Government Assistance: The Hong Kong government has also set up a number of different funding schemes to help small businesses in obtaining loans from banks or money lenders. (See below) Terms of the loan: A small business loan and a traditional bank loan differ in terms of loan amount, interest rate, repayment term, turnaround time and security requirement. Please see the table below for some general information: Small business loan Traditional bank loans Loan amount HKD 400,000 to 40 MillionsOver 2 MillionsRepayment terms 5 - 25 years1 - 20 years Interest rate6% - 13% per annum5% - 10% per