Partner's current account: alternative financing for your company
A partner's current account is one of the financing options available to a company, other than a contribution to share capital or a bank loan.
But what exactly is a partner's current account? What is it used for, and how does it work? Find out more about this alternative financing method with its many advantages!
What is a partner's current account?
Definition
A partner's current account is a loan granted by a partner to a company of which he or she is a member. It can be granted when the company is set up, or at any time during its lifetime.
It can take one of the following forms:
- a transfer to the current account,
- or a temporary waiver of amounts owed by the company, such as dividends.
This advance is generally remunerated by interest.
💡 Please note that this is not an account in the bank account sense, but in the accounting sense: it is therefore a set of accounting entries. A partner's current account is opened for each lender.
Who can have an associate current account?
Any shareholder or partner can open an associate's current account, regardless of their share of the company's capital.
What is a partner's current account for?
This alternative financing method to bank loans and leasing is particularly useful for :
- obtaining rapid cash flow to finance a project or deal with unforeseen circumstances, if cash is needed to get through a difficult period;
- strengthen shareholders' equity in order to present solid guarantees to an investor or a bank.
Partner's current account on the balance sheet
Although sums paid into a partner's current account constitute a resource, it should not be forgotten that they are , by their very nature, debts.
They are therefore entered on the liabilities side of the balance sheet under liabilities, on the line " Borrowings and miscellaneous debts ", as is any interest accruing on them.
If the accounts are blocked, the interest is shown under Other equity.
How does a partner's current account work?
Drawing up a partner's current account agreement
Although this step is not formally compulsory, it is nevertheless highly recommended!
The agreement is a document that sets out the various terms and conditions of the partner's current account, providing a legal framework. It is signed by the partner contributing the funds and by the company, and engages the responsibility of each in the event of non-compliance with the provisions laid down.
Here are the various elements that may be included:
- the identities of the signatories to the agreement,
- the duration of the agreement,
- the amount contributed
- the anticipated remuneration,
- repayment terms,
- the temporary blocking of the contribution to the partner's current account for the purpose of obtaining a bank loan (as it serves as a guarantee),
- the transfer of the partner's current account in the event of a share transfer.
Remuneration of the partner's current account
The remuneration of the advance paid is :
- mandatory if the contribution is made by a legal entity,
- optional for individuals.
In addition, the interest rate is set by both parties, and must comply with three rules:
- it must be fixed throughout the period,
- be reasonable,
- be set down in writing.
Repayment terms
Unlike a contribution of share capital, the partner may in principle request repayment of the advance on the partner's current account without the company having been dissolved:
- at any time,
- on simple request,
- without any particular justification.
However, if specific terms and conditions have been laid down in the agreement, these must be respected:
- the minimum date set,
- the procedure for requesting reimbursement,
- the length of the notice period,
- the possibility of repayment in instalments,
- conditions for refusal (for example, if cash flow falls below a certain threshold).
👆 Furthermore, the request must not be made with the intention of harming the company.
Is a debit current account possible?
A debit partner's current account is a loan granted to a partner by his or her company, which is unconditionally possible in SNCs and non-trading companies.
On the other hand, it is only possible for legal entities in :
- SARL,
- SAS,
- SA,
- and SAC.
This option is not available to intermediaries, ascendants, descendants or spouses of the legal entity.
Procedures in the event of a partner's death
In the event of a partner's death, what happens to the sums paid into the partner's current account?
In the same way as a receivable, it is transferable to the heirs. The heirs must then follow the terms of the agreement.
Taxation: focus on the deductible rate for shareholders' current accounts
How should interest paid on a partner's current account be treated for tax purposes?
👉 On the company side, this interest can be deducted from income, subject to two conditions:
- the company's share capital has been paid up, i.e. the promise to contribute has been fulfilled,
- the rate set does not exceed the thresholds defined by the tax authorities (if higher, the excess must be added back to income).
By way of example, here are the reference rates for a financial year ending on :
- 30/09/2020 : 1,20 %
- 31/10/2020 : 1,19 %
- 30/09/2020 : 1,19 %
👉 On the individual shareholder's side, interest is considered as income from real estate capital, and is therefore subject to income tax.
👉 For corporate shareholders, interest is :
- either considered as financial income, and therefore subject to corporation tax (IS),
- or subject to income tax.
The partner's current account: undeniable advantages
A partner's current account is a relatively flexible procedure, quick to set up and offering numerous advantages...
... for the company :
- avoid the need for a capital increase, a cumbersome procedure,
- it is easier to obtain a bank loan or other external financing by temporarily blocking the funds as collateral,
- the cost is lower than a bank loan.
... and for the partner :
- the funds are more easily recoverable than a capital contribution,
- the advance is remunerated.
What about you? Have you ever used a partner's current account to find financing for your business?
Article translated from French