Loan agreements – Client Queries Answered II
Ecommerce Accountants: Client Queries Answered
We are Accountants for Amazon Sellers and other Ecommerce Businesses and we have started to document some of the queries that we receive so that others can benefit from the answers.
The last question that we answered related to VAT for drop shippers, however, the question that we are about to deal with is slightly more general by nature.
Before we begin, if you have a question that you would like answered, please get in touch with us today.
The Client’s Question:
“Hi Ecommerce Accountants
Also one last thing…
So my father is willing to put £2,000 into the company so that I can get another product on the marketplace quickly. How would we go about this?
Should I write up a little contract for him to sign? And then also how does he send the money into the business bank account? Would it be as simple as writing a cheque?
“… It is always good practice to have something in writing … “
First, let’s split this into two small sub-questions:
Question 1: Should you write up a contract for the transaction?
This may seem a little overkill, especially considering it is your dad who is lending you the money for the business, but it is always good practice to have something in writing, especially in situations like these.
The reason for this is that it stops any arguments or disagreements cropping up later. For example, let’s say you cannot pay the loan back, or, your business does incredibly well, both situations could lead to issues.
By having something in writing you can clearly show what both parties should expect from the transaction, preventing future issues.
Things you may want to consider including/discussing when writing the agreement:
- How much money is he paying into the business and is this a one-off payment? This may seem obvious, but it can be easily overlooked. You do not want to agree on something, only to have someone pay you more (or less) therefore it is best to be as specific as possible up front so that both parties are crystal clear.
- Does he expect to receive interest on this loan, or is it an interest-free loan? You do not want to agree that the loan is interest-free, only to have the business do well and have someone demand more at a later date.
- If he’s receiving interest, what rate per annum is he going to get? If there is interest due on the loan then both parties will want it clearly written down.
- Does he expect a share of the business (or to benefit further from future gains in the business)? Following on from point three, you do not want someone to claim that their loan was, in fact, a capital injection in exchange for shares. It may end up being your word against theirs, so it is best to get it written down.
- What happens if the business is unable to repay the loan? If the business is unable to repay the loan, will you, the director, be personally liable, or will the loanee write the loan off?
- What are the loan repayment terms going to be? Will he expect to be paid monthly, quarterly, annually and/or what happens if you want to repay the loan early?
“… it is best to be as specific as possible up front so that both parties are crystal clear…”
“… if he is depositing the cash as a loan, use the reference “loan from dad”… “
Question 2. What should he do when putting the money into the business?
I wish I could tell you there was something technical and exciting, but I am afraid there isn’t anything weird or wonderful that he needs to do here!
After you have your agreement, all he needs to do is put the money into the business.
I would say on this that using a good reference helps (especially if it comes to having to answer questions in a compliance visit from HMRC in 5 years time)…
… So if he is depositing the cash as a loan, use the reference “loan from dad” or if he’s purchase share capital “share purchase”.
If he is purchasing shares, we will need to complete form SH01 and submit it to Companies House, but I believe that won’t be necessary here.
I hope that helps – If you have any other questions, please let me know!
Accountants for Amazon FBA Sellers
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