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.

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
  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...
  
  .
• The contribution of shareholder loans to a corporation's capital structure
  Capital structure
  In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...
  
   generally relieves the corporation's debt load and is therefore used in LBO
  LBO
  LBO may refer to:* large bowel obstruction* Leveraged buyout, a method of acquiring a company* Lithium triborate , substance* Left Business Observer, an economics newsletter published by Doug Henwood...
  
  s to manage a degree of leverage.
• Shareholders can extend the loan in distressed or near-default situations to save the company.

External links

• S Shareholder Loans: Potential Tax Trap
• Tax aspects of contributions to capital of shareholder loans