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Director and Shareholder Loan Agreement
A Director/Shareholder Loan is a loan agreement for a company to borrow money from its director or shareholder.
Contrary to a commercial loan agreement, a loan under a Director/Shareholder Loan can be interest free and repayable on demand.
Given the relationship between the borrower and the lender, a Director/Shareholder Loan does not contain extensive representations and warranties, nor any obligations or restrictions on the part of the borrower.
In a nutshell, it’s common for directors and shareholders to put money ‘into’ the business. Importantly, if this money is coming in as a loan, you should get the terms and conditions of the loan in an agreement to keep a record of the loan. Also, this establishes in detail the obligations of each party in the agreement, along with any other terms or conditions.
You can use a Director Loan Agreement or Shareholder Loan Agreement, depending on who is financing the loan to the company.
What is a Director loan?
A Director (or Shareholder) loan is one of the common ways of debt financing in a company. Typically, this is especially true for startups before they have a profitable business and need help getting conventional bank financing.
It is a loan given by a director or a shareholder to the company to meet its financing needs. Notably, it should be distinct from a loan from the company to the shareholder or director.
Usually, this is a restricted transaction and can only be made after meeting certain conditions outlined in the corporate laws.
What is the benefit of a Director or Shareholder Loan?
Contrary to a commercial loan agreement, a loan under a Director’s/Shareholder’s Loan Agreement can be interest free and repayable on demand.
Given the relationship between the borrower and the lender, a Director’s/Shareholder’s Loan Agreement does not contain extensive representations and warranties, nor any obligations or restrictions on the part of the borrower.
What is debt financing?
Debt financing is when a company borrows money and agrees to pay it back at a future date.
In fact, any form of loan falls under debt financing. This includes a director/shareholder loan.
Other ways to get money into a company
Additionally, equity financing is another way to get money into a company.
Equity financing is where a company raises capital by issuing company shares. The main difference is that, unlike a debt/loan, the money brought in through equity does not need repaying.
Why do I need a Director Loan Agreement?
It is always best to have a written loan agreement to keep a record of the loan and each party’s obligations. Additionally, it details any other terms or conditions to avoid any problems or disputes in the future.
What to include in Director Loan Agreement
If a person is a shareholder and a director, you can choose either the director loan or shareholder loan agreement.
The agreement includes terms and conditions of the loan, such as:
- Principal amount;
- Interest rate (if any);
- Term of the loan or Availability period; and
- Dates for repayment.
Given the relationship between the company (the borrower) and the director/shareholder (the lender), a Director/Shareholder Loan may not necessarily contain extensive representations and warranties or any obligations or restrictions on the borrower’s part.
Can a director loan money from his company in Singapore?
A director is generally, not permitted to take a loan from the company. However, it is not entirely impossible to do. You will have to look into and follow the rules in place to ensure proper corporate governance to be able to do so.
Create a director loan agreement template
Keeping a transaction record is essential when taking a loan from crucial company personnel, such as a director or a shareholder.
Get your Director Loan Agreement right the first time with a Zegal template, and easily keep a record of the document in the cloud.
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