A shareholder loan is a loan agreement between a company and an investor, typically used for financing company projects in exchange for interest payments. It is common for new businesses with positive cash flow, and can have deferred interest payments and a longer payback period. It may also have subordinated loan status, requiring guarantees for compensation in the event of bankruptcy.
A shareholder loan is a type of loan agreement between a company and an investor. Loans of this type can be extended by individual investors or by a group of investors. Typically, the loan structure provides financing for some company projects in exchange for receipt of interest payments that are issued according to the schedule associated with the loan. A shareholder loan can be secured with shares issued by the company or some other collateral that is mutually acceptable.
This type of financing is very common in situations involving new businesses that have already exhibited the ability to generate positive cash flow. Since many banks would still view the new business as a risk, the shareholder loan fills the gap and allows the company to continue to grow the business. As part of the terms of the loan agreement, the investor may choose to defer interest payments for a period of time, allowing the business to increase cash flow before addressing the debt obligation.
It is not unusual for the terms of a shareholder loan to give the company a long time to pay off the debt. This approach benefits the business receiving the loan, as it is possible to defer making any type of loan payment for a longer period of time than would be possible with a commercial loan. This in turn gives the business more time to build a clientele and become financially stable before having to make interest payments on the shareholder loan. At the same time, the investor gets the benefit of accruing additional interest the longer the loan remains outstanding, which only serves to increase the amount of return earned from the business.
Depending on how a shareholder loan is structured, it may be granted subordinated loan status. This simply means that instead of having seniority in the event the company goes bankrupt and goes bankrupt, investors must wait until the highest priority debts are paid off before receiving any type of compensation for the amount invested. For this reason, many investors who provide this type of loan require guarantees to guarantee the loan and achieve a greater placement in the settlement of outstanding debts. While this approach may or may not result in avoiding junior debt status, associating debt with a specific asset or group of assets may increase the amount of compensation ultimately received from the bankruptcy action.
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