When parties like directors or shareholders put money in the business in the form of a loan, the company must record the loan agreement and the loan payment strategies, among other conditions included in the obligation.
This post discusses what a shareholder loan agreement is and when you need to use it. Plus, the importance of shareholder loans agreement to both the company and the directors.
What is a shareholder loan agreement?
A business can have different ways of sourcing money to run its operations. These ways may include equity financing, which entails getting finances through issuing a share of the firm. This kind of money is usually not refunded.
Another method is through debt financing. This is when the business borrows money and pays later. And a company may borrow money from banks and other financial institutions. Also, the company may get loans from its directors or shareholders to help their financial expectations. That’s what we call shareholder/director loans. But the shareholders have to sign a loan agreement.
So, by definition shareholder/director loan agreement is a legal consent between a company and its shareholders. It contains the details of the loans including, the amount and method of the payment and loan- interest rates.
What is the content of the shareholder loan agreement?
Just like any other loan, a director or shareholder loan agreement should have:
Shareholder/directors details- their names and addresses
The company details –names and address
The amount of money given (principle amount)- including interest rates if there are any
The payment structure and schedule- This dictates how the money has to be paid. Depending on the agreement, it can be on specific dates or a regular payment after a particular time.
Default details- actions to be taken should the corporation fail to make payments as agreed.
The signatories- include the dates and the witnesses’ signatures
Depending on the relationship between the corporation and the shareholders or the directors, the loan agreement may or may not involve any extensive warranties.
Why does a corporation need a shareholder loan agreement?
Usually, a director or shareholder loan agreement shows that a corporation owes some money to its shareholders. Better still, the loan agreement helps keep records of the terms and conditions of both the parties involved in writings.
The essential function of the shareholder loan agreement is the fact that it helps avoid future disputes. Also, the shareholder loan agreement helps provide documentation or a record that a certain amount of money was deposited into the business account as a loan rather than revenue.
When to use the directors or shareholders loan agreement?
This agreement can be used anytime a business or company receives money from its shareholders or directors in the form of loans. In addition, when founders of a corporation lend money to the business or the company, it should then be documented in a shareholder loan agreement for future references.
Anytime a business is taking a loan from its stakeholders and directors, the firm must record its transactions and payment strategies. This would help prevent any future disputes that might arise in case of fallouts. So, for correct and updated shareholder loan agreement forms, you may download the templates from forms.legal today.