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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, and since this loan belongs to shareholders it should be treated as equity. Maturity of shareholder loans is long with low or deferred interest payments. Sometimes, shareholder loan is confused with a loan from company to shareholders.
[edit] 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 generally relieves the corporation's debt load and is therefore used in LBOs to manage a degree of leverage.
- Shareholders can extend the loan in distressed or near-default situations to save the company.[1]
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