DIRECTORS LOAN - FRANCHISE

[krimpie]

Good Morning,

Need some advice. Two people are starting a company, they are buying a franchise. Both are entering into loans to finance the purchase of the franchise. Both will take out R 350 000 loans (bond financing) to finance the buying of the franchise. What is the best way to structure these and repayments. Should they be be registered as long term liabilities on the balance sheet and monthly repayments of the loan recorded as such or is it better to register these as debentures with monthly interest payments? i.e on a R350k debenture at 15% monthly interest repayment?

[CLIVE-TRIANGLE]

I suggest that they be regarded as simple shareholder loans. Using debentures makes the repayment arrangements pretty rigid for a startup and the interest may well be so onerous that they could run into solvency issues.

At least with shareholder loans they can periodically review the terms. Debentures are pretty permanent and are pure debt, whereas shareholder loans are almost equity.

[krimpie]

Thanks Clive, that is probably the simplest way. At the moment the business they are buying is cashflow possitive delivering about 30-50k nett but who knows what happens with changes etc. Shareholders loan it will be

[reuphk]

@krimpie
Keep in mind that repayments of capital is not income. Interest received is. Tax implication.
I agree with Clive - keep as shareholder loan, rather than issue debentures, however make sure that you have a shareholder agreement in place on how this is dealt with in case something goes wrong with the partnership. As much as what we dont wish for this, it is the same as a marriage prenup...
All the best on your business!