Is It Possible For Two Limited Companies to Borrow Money From One Another?
Loans are a major source of funding that allow a company to function smoothly, and with the abundance of financial institutions and banks offering low-interest loans, companies can borrow money from any source they find feasible. But the question is, can a limited company ask for money from a fellow limited company? Well, the answer is YES.
Of course, companies can lend money to one another, but there are a few factors that need to be considered before doing so. In this post, we’ll be specifically focusing on such factors and will familiarize you with the entire process.
But before hopping onto the details, there’s one thumb rule that must be remembered – company-to-company lending is a complex procedure that should occur under only the circumstance that a sole shareholder director owns both of these limited trading companies.
Now, let’s move on.
#1 – Borrowing is possible only from legal surplus
For a company to be able to lend money to another, it should have a legitimate surplus, or at least, sufficient reserves. Moreover, the directors of both companies should follow the statutory rules and regulations enacted under the company’s constitution when such a transaction takes place. Lastly, both companies should be able to prove that the purpose of such borrowing and lending is solely to promote the borrowing company’s growth and evolution. Overall, the loan must be legal/lawful in the eyes of company laws.
#2 – Participator rules must be followed
Participator rules are most commonly applied when a company lends its funds to a particular shareholder or their associates; such a loan is then shown as outstanding in the books. If applied, a 32.5% tax is charged on the outstanding amount, after a period of nine months, post the accounting date. Plus, there’s room for a complex extension, but that’s only applicable if this rule is applied in the first place.
#3 – Debit vs Credit
When one company lends money to another, there’s an expectation that the loan will be repaid at some point in the future. This relationship is called a “loan relationship” in financial terms. Meaning, the lending company will have to pay corporation tax with regard to the interest it achieves, and the borrower will get tax relief for paying interest payments.
But, you have to keep in mind that once the loan is paid off, both the companies will still be connected. This is because the amount loaned out will be shown as a non-tax-deductible ‘debit’ in the lending company’s accounts and as a non-taxable ‘credit’ in the borrowing company’s account.
All in all, lending money to a fellow limited company is very much possible, but it comes with its own set of pros and cons. Of course, the material given in this article cannot cover all the aspects of loaning money to a different company, therefore, it’ll be a smart choice to consult a professional before taking any legal step.
More in Loans
Recession-Proof Franchise, A Myth or A Reality?
When you are considering franchise options, the term ‘recession-proof’ might be recurring. The basic meaning for the claim is a business...January 20, 2022
This Sneakerhead went from Being Homeless to Owning a Multimillion-Dollar Business
The business world is filled with many rags-to-riches stories that would surely inspire a lot of people who are dreaming of...December 23, 2021
What’s The Ideal Credit Score to Be Eligible For a Personal Loan?
Are you struggling to get approval for a personal loan? Do you find it a little too hard to understand the...December 21, 2021
The Best Financial Planning Tips for People With a Significant Net Worth
Some people are under the impression that financial planning is only essential for people who earn minimum wage or those with...December 17, 2021
A Few Tips Before You Get on the Entrepreneurship Bandwagon
At the age of 16,Richard Branson, the business magnate, started his entrepreneurship journey by launching the ‘Student’ magazine. The idea was...December 7, 2021
They Just Don’t Stop Showing Him the Money – Perks of Being Michael Jordan
It has been decades since Michael Jordan retired from the NBA, but his saga is not ending anytime soon! Often named...December 5, 2021
Attention, Companies! Delight The Parents In Your Workforce With These 3 Enticing Perks
Wake up, it’s 8 am already! Wake up your little one, make breakfast asap, change your bedsheets, make your child sit...December 3, 2021
How to Financially Cope with the Death of a Loved One
Losing a loved one isn’t an event a person gets over right away. The process of mourning can take months to...November 30, 2021
Justin Bieber and Crocs’ Potential Collaboration is Already Paying Off Even Before Launching
There was a time when young people won’t ever be caught wearing a pair of Crocs. Although they’re one of the...November 22, 2021