Convert Shareholder Loans into Equity



Donors convince


For owner-managed companies, it is the rule rather than the exception: the share capital is relatively low, but the entrepreneurs repeatedly lend their company private money. These shareholder loans are indeed debt capital, but in the balance sheet analysis of the banks are normally regarded as debt. See for the scoop

However, for the assessment of the creditworthiness of the company, it would be much better if these funds could be classified as equity. By submitting a subordination order from the lender (in this case the shareholder), a shareholder loan can subsequently also be converted into liable capital or, as banks say, into “equity-like funds”.


What should I do?

What should I do?


In a written subordination order, the lender agrees to withdraw his claim in the rank behind all other creditors of the company. That is, the repayment of loans with subordination clause can be required only if the claims of all other creditors are satisfied. With the introduction of the MoMiG (Law for the modernization of the GmbH right and for the fight against abuses) no special requirements are placed on a subordination order. Since then, shareholder loans are considered as liable capital anyway in the event of insolvency.

Samples for submission declarations are available for free download on the Internet. If you want to make sure that you do not fall into a tax trap, you should coordinate the content of the subordination agreement with the tax adviser.

According to my observations, most banks today still only credit shareholder loans to economic capital if explicit subordination has been agreed.


The consequences

The consequences


The impact on the capital structure can be illustrated in a simple example.

Let’s assume that a company has a balance sheet total of € 1,000 thousand, a share capital of € 50 thousand and a shareholder loan of € 250 thousand.

Excluding the shareholder loan, the equity ratio was only 5% (€ 50 thousand / € 1,000 thousand x 100).

Including the shareholder loan, the equity ratio rises to 30% ((€ 50 thousand + € 250 thousand) / € 1,000 thousand x 100).

The level of the equity ratio has a decisive influence on the rating result. With an equity ratio of 30%, manufacturing companies are also generally considered to be highly capitalized. By contrast, an equity ratio of 5% would be rated very critically. Thus, the equity rating also improves the rating rating. This makes loan financing easier and more favorable.


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