Shareholder loan

What it means

A shareholder loan is money lent to the company by its own member. It is a fast way to add funds without a bank and without changing the ownership structure.

In the books it is a liability, not equity. Gearing therefore rises and the ratios a bank looks at get worse.

A shareholder loan differs from a convertible loan in that the shareholder wants the money back, not a bigger stake. It gives no right to convert into equity and no say in management beyond what the shareholder already has. If the shareholder later decides to leave the money in the company for good, that is a separate step with a separate decision.

How it works in practice

The interest must be at arm’s length: a member is a related party, so transfer pricing rules apply. Both an interest-free loan and an inflated rate are audit risks.

The alternative is a capital increase or a contribution to the capital fund. The money is not repaid, but equity strengthens and the company presents better to banks and partners.

In a small s. r. o. the shareholder often pays the first expenses from a personal account or card. We recommend recording these amounts at once in a written loan agreement with the amount, interest and due date. Without one it is hard to explain later why the company is sending the shareholder money and on what basis.

What to watch out for

While the company is in crisis such a loan may not be repaid. Repayment breaches the law and the director is personally liable, even having merely returned money to whoever lent it.

Interest paid to related parties is deductible only up to a certain share of the company’s EBITDA. With a large loan and low profit, part of the interest will not be deductible even though it is at arm’s length and properly paid. It pays to set the loan amount and rate with the expected result in mind, not just the need for cash.