Shareholder Loan: Meaning, How It Works, and How to Calculate Loan Value

What Is a Shareholder Loan?

A shareholder loan is a type of debt financing in which a company borrows funds from one of its shareholders instead of from a bank or outside lender. It acts as an internal source of financing provided through a loan agreement between the shareholder and the business.

Companies use shareholder loans when they need quick, flexible funding for cash flow support or early-stage growth. This arrangement is common in startups, family-owned businesses, M&A transactions, and private equity buyouts, where outside financing may be limited or slow to arrange.

How Does a Shareholder Loan Work?

A shareholder loan works through a formal agreement between a company and one of its owners. The business either receives funding from the shareholder or provides funding to the shareholder. The process is straightforward, and each step shapes how the loan is documented and managed.

1. A shareholder provides or receives funds.

The loan can move in either direction. A shareholder may lend money to support operations, growth projects, or short-term liquidity needs. In some cases, the company may lend money to a shareholder, which is more common in closely-held businesses.

2. The loan terms outline repayment and interest.

The shareholder and the company agree on key terms such as the loan amount, interest rate, and repayment schedule. Private companies often choose flexible terms that match their cash flow and financing needs.

3. The loan appears on the balance sheet.

When a shareholder lends money to the business, the amount is recorded on the balance sheet as a liability, often labeled “Shareholder Loan Payable.” This accounting treatment separates loan funding from equity contributions or distributions.

4. Interest is paid in cash or added to the balance

Some shareholder loans require regular cash interest payments. Others use PIK (payment-in-kind) interest, where interest accrues and increases the outstanding principal amount. PIK interest helps the business conserve cash during growth periods or financial pressure.

5. Repayment reduces the loan balance.

Repayment can occur through direct cash payments, offsets against dividends or salaries, or a conversion of the loan into equity when both parties agree. Because the loan is internal, repayment terms can be adjusted more easily than bank debt.

What Is the PIK Interest Rate on a Shareholder Loan?

The PIK interest rate on a shareholder loan is the rate used to accrue interest and add it to the loan balance. 

At the end of each compounding period, interest is calculated using the PIK rate and added to the outstanding balance. The next period’s interest is based on this higher amount.

Example

If a shareholder loan has a principal amount of $1,000,000 and a PIK interest rate of 10%, the balance after one year becomes:

1,000,000 x (1.10) = 1,100,000

No cash changes hands. The accrued interest simply increases the outstanding loan balance.

PIK interest is common when a business needs to conserve cash or maintain flexibility. It’s typically used when cash flow must be directed toward operations or senior debt for startups, restructurings, and leveraged buyouts (LBOs).

How to Calculate Shareholder Loan Value

You can calculate the value of a shareholder loan by applying a compound-interest formula when the loan uses PIK interest and has no repayments. 

Shareholder Loan Value Formula

The shareholder loan value formula is:

Shareholder Loan Value = Original Capital Investment x (1 + PIK Interest Rate)^n

Where: 

• Original Capital Investment is the initial amount the shareholder lent to the company.
• PIK Interest Rate is the rate at which interest is accrued and added to the principal instead of being paid in cash.
• n is the total number of compounding periods, usually measured in years.

This formula captures the compounding effect of PIK interest. Each year’s unpaid interest becomes part of the principal, so future interest is calculated on a larger balance.

Example Calculation

• Original shareholder loan: $1,000,000
• PIK interest rate: 10%
• Years: 3

1,000,000 x (1.10)^3 = 1,331,000

The shareholder loan value after three years is $1,331,000.

What Are the Benefits of Shareholder Loans?

A shareholder loan gives a company and its owners a flexible way to move money into or out of the business without changing ownership. It sits between traditional debt and equity, offering financing that can adjust to the company’s needs.

1. Flexible financing

A shareholder can lend money when the company needs support for cash flow, early growth, or a temporary funding gap. Because the lender is an insider, the terms can be tailored with features such as no cash interest, deferred repayment, or subordination to bank debt.

2. Access to capital without diluting ownership

A shareholder loan provides funding without issuing new shares. This keeps the ownership structure intact, which is especially important in private companies. The shareholder is repaid later under the terms of the loan instead of receiving additional equity.

3. Strengthen the capital structure

In many private businesses, shareholder loans behave like quasi-equity. These loans are subordinated debt, carry flexible repayment terms, or use PIK interest. This structure strengthens the balance sheet while avoiding changes to formal equity.

4. Tax and financial efficiency

Depending on local tax rules, shareholder loans can provide tax benefits for the company and shareholder. Interest may be deductible for the business, and the shareholder may receive interest income that is taxed more favorably than dividends.

5. Support recapitalizations and ownership transitions

Shareholder loans are often used in leveraged buyouts, management buy-ins, and restructurings. They allow owners to help fund a transaction when external financing is limited or less flexible.

What Are the Risks of Shareholder Loans?

Shareholder loans offer flexibility, but they also introduce financial, tax, and internal risks that companies and shareholders need to consider before using them. 

Here are the key risks to understand.

1. Higher debt and increased financial pressure

A shareholder loan increases the company’s total debt. Higher debt can strain cash flow, limit other financing options, and reduce financial resilience if the business faces weaker performance.

2. Tax and compliance complications

If a shareholder loan is not properly documented or priced, tax authorities may reclassify it as a dividend or employment income. Companies may also lose interest deductibility or face penalties for below-market interest rates.

3. Potential conflicts among shareholders

Disputes can arise when only some shareholders provide loans or when lenders expect repayment before dividends. Mixing ownership and creditor roles can create tension, especially in family-run or closely-held businesses.

4. Distorted view of financial performance

Flexible terms such as PIK interest, no repayment schedule, or zero interest can make it harder to assess the company’s true financial position. Accrued interest, for example, increases liabilities without affecting cash flow, which may hide underlying financial strain.

5. Challenges in raising outside financing

Banks and investors may hesitate when they see large shareholder loans on the balance sheet. These loans increase leverage and can complicate creditor priority. Lenders often require subordination agreements or loan-to-equity conversions before approving new financing.

Frequently Asked Questions

What is a shareholder loan in simple terms?

A shareholder loan is a loan from an owner to a company, making it a form of debt. It involves the obligation to repay the principal and pay interest, though this can sometimes be deferred or flexible. Shareholder loans are liabilities for the company, similar to bank loans. 

Why use a shareholder loan instead of a bank loan?

A company may choose a shareholder loan because it offers faster and more flexible financing than a bank loan. Shareholder loans can be arranged quickly, usually without strict bank requirements. They’re especially helpful for startups and small private companies that need cash but can’t access bank financing or want flexible loan terms that meet their needs.

Why use a shareholder loan instead of equity?

Companies use shareholder loans instead of equity when they want flexible funding without changing ownership percentages. A loan provides capital without issuing new shares, avoids diluting existing owners, and can often be repaid on a timeline that suits the business. It can also offer tax advantages and allow shareholders to earn interest, making it a practical alternative to raising equity.

What is another name for a shareholder loan?

A shareholder loan may also be called a shareholder advance, shareholder note, related-party loan, or due to/from the shareholder. These terms all describe the same concept: an internal loan between a company and one of its owners.

Additional Resources

Capital Stack

Debt Financing

Leveraged Buyout

Senior Term Debt

See all Valuation resources