Shareholder loan is a debt-like form of financing provided by shareholders. Usually, it is the most
junior debt
In finance, subordinated debt (also known as subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts if a company falls into liquidation or bankruptcy.
Such debt is referred to as 'subo ...
in the company's debt portfolio. On the other hand, if this loan belongs to shareholders it could be treated as equity. Maturity of shareholder loans is long with low or deferred interest payments. Sometimes, shareholder loan is confused with the inverse, a loan from a company that is extended to its shareholders.
Applications
* This form of financing is quite common while funding young companies with positive cash flows because such firms are still not able to raise debt from banks but need debt anyway to create a
tax shield
A tax shield is the reduction in income taxes that results from taking an allowable deduction from taxable income. For example, because interest on debt is a tax-deductible expense, taking on debt creates a tax shield. Since a tax shield is a way ...
.
* The contribution of shareholder loans to a corporation's
capital structure
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...
generally relieves the corporation's debt load and is, therefore, used in
leveraged buyout
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loan ...
s to manage a degree of
leverage
Leverage or leveraged may refer to:
*Leverage (mechanics), mechanical advantage achieved by using a lever
* ''Leverage'' (album), a 2012 album by Lyriel
*Leverage (dance), a type of dance connection
*Leverage (finance), using given resources to ...
.
* Shareholders can extend the loan in distressed or near-default situations to save the company.
Subordination of Shareholder Loans from a Legal and Economic Perspective
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See also
*Hybrid security
Hybrid securities are a broad group of securities that combine the characteristics of the two broader groups of securities, debt and equity.
Hybrid securities pay a predictable (either fixed or floating) rate of return or dividend until a certai ...
*Seniority (finance)
In finance, seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. Seniority can refer to either debt or preferred stock. Senior debt must be repaid before subordinated (or junior) debt is repaid.The America ...
*Venture lending Venture debt or venture lending (related: "venture leasing") is a type of debt financing provided to venture-backed companies by specialized banks or non-bank lenders to fund working capital or capital expenses, such as purchasing equipment. Ventur ...
References
External links
{{Authority control
Corporate finance
Loans
Loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...