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
Dream of Owning a Home? Here are Five Steps You Should Take Today to Make it Happen Sooner
The home buying process comes with a lot of research and preparation that needs to happen even before you actually start...October 23, 2020
Find The Best Economical Franchise for Yourself
Dominos, McDonald’s, Chick-fil-A are some of the most popular franchise options because they offer sure-shot revenue due to their popularity and...May 31, 2020
Having Problem Choosing the Perfect Car Loan? This Might Help You
Some investments are unavoidable when you want to live a comfortable life, like a house and a car. These necessities require...May 31, 2020
Invest in Your Children – And for Them Too
engagestock/Shutterstock: Planning for your kid’s future Responsible parents understand the value of saving up for their children’s futures. Astute financial planning...May 31, 2020
What to Do When a Large Client Goes Bankrupt
Scoring a large clientele is a cause for celebration. Still, news of the bankruptcy of the client can put a dampener...May 31, 2020
What Happens When You Are In Disagreement With Your Franchisor?
The excitement at the time of buying the franchisee was running high, you had vetted the franchisor and had faith in...May 31, 2020
Did An Employee Sue You? Don’t Fret!
Studies have revealed that one in every ten small businesses has gotten sued by the employees, and a disturbing 43% has...May 31, 2020
Things You Must Know About Independent Contractors
Have you ever heard the term “independent contractor”? Even though it sounds foreign to your ears, many companies have been hiring...May 31, 2020
Finishing Your Student Loans Faster, Why Not?
A student loan is like a wolf in sheep’s clothing. It seems soothing at first, yet the constant interest will haunt...May 30, 2020