Shareholder loan is a debt-like form of financing provided by shareholders. Usually, it is the most
junior debt 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.
* 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 th ...
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 loa ...
s to manage a degree of
leverage.
* 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
*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
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 ...