Shareholder loans into a company: record the cash as debt, not revenue or share capital

A shareholder can fund a company by lending money instead of subscribing for more shares. The bank receives cash either way, but the legal and accounting effect is completely different: a shareholder loan is normally a debt owed by the company and can be repayable under the agreed terms.

Document the amount and repayment terms

Use a written loan agreement where the amount is material. State currency, interest, maturity, repayment rights, security and whether the loan is subordinated to bank debt.

Do not rely on a bank reference saying "loan from owner". Future investors and lenders will want to know whether the shareholder can demand repayment and on what notice.

Send the money into the company account with a clear reference

The shareholder should transfer funds to the company's account, not pay company suppliers personally unless the accounting treatment is clear.

Record the receipt as a shareholder-loan liability. It is not turnover and does not become share capital merely because the lender already owns shares.

Agree whether interest is charged

A shareholder loan can be interest-free or interest-bearing depending on the terms and tax considerations. If interest is charged, document the rate and payment schedule.

Tax treatment can differ for company interest and shareholder income, especially where the lender is overseas or connected. Use current tax advice for material arrangements.

Existing lenders can restrict shareholder repayment

Senior banks can require shareholder loans to be subordinated or prevent repayment while bank debt is outstanding or covenants are weak.

Check facility agreements before sending money back to an owner. A company can have plenty of cash and still breach lender terms by repaying subordinated shareholder funding too early.

Register security if the company grants a charge

If the shareholder loan is secured by a company charge, Companies House registration rules can apply just as they do for external lending.

Do not assume an owner can take security informally. Directors should consider creditor and conflict issues and obtain legal advice.

Separate principal, interest, dividends and expenses

When the company sends money back to a shareholder, identify whether it is principal repayment, interest, dividend, salary or expense reimbursement.

Maintain a loan statement so the shareholder and company ledger agree. A vague owner-current-account balance can become difficult during a sale, tax enquiry or audit.

Worked example: a founder lends the company £300,000 for 24 months. The company records £300,000 cash and a £300,000 liability. If the founder later receives £50,000, finance should identify whether that reduces principal or represents interest. Calling every transfer "owner payment" is not enough.

Use board approval for material owner funding. Directors should record why debt is appropriate instead of equity and whether the company can meet repayment without harming creditors.

If the shareholder loan will remain long term, review whether its terms still match the commercial reality each year. A loan that is never expected to be repaid can be treated differently by future investors and lenders from genuine short-term owner finance.

Where several shareholders lend different amounts, keep separate loan accounts and agreements. Do not combine all owner funding into one balance unless the terms are identical and accounting remains traceable. Each lender can have different maturity, interest and subordination rights.

Check whether repayment would create solvency concerns even if the agreement allows it. Directors still need to consider the company's ability to meet debts after paying the shareholder. A contractual right to repayment does not mean the board should authorise a payment that leaves suppliers or tax unpaid.

For a future equity round, disclose shareholder debt clearly. New investors may require conversion, subordination or repayment before completion. Clean documentation lets the company negotiate those outcomes instead of reconstructing years of informal founder transfers during due diligence.

For overseas shareholders, check whether interest payments create UK withholding obligations or treaty paperwork. The principal bank transfer can be simple while recurring interest adds tax administration. Agree gross-up and tax clauses before the company starts paying interest.

Keep repayment priority clear during a sale. A purchaser may treat shareholder loans as debt to be repaid at completion, deducted from equity value or converted before closing. Clean loan records help prevent founders and buyers arguing over whether the balance belongs in debt or purchase price.

If the company later capitalises the shareholder loan into shares, document the conversion formally and update both debt and equity records. A journal entry alone does not replace the corporate approvals and allotment steps needed to change a creditor into additional share capital.

When a shareholder waives repayment or forgives the loan, obtain tax and accounting advice before posting the balance away. Debt release can have different consequences from capitalising the loan or leaving it outstanding indefinitely.