Self-financing the purchase of a small business

I am looking to self-finance the purchase of a small business. Should I classify this as long-term loan or shareholder's capital?

The tax advantages generally favour treating the owner’s capital as debt because interest can be charged and treated as a deduction from taxable profits. However there are other reasons why you may want to have some finance as share capital.

If you do need to raise finance from a bank they will look carefully at the amount of share capital (and retained profits) you have contributed to the business before agreeing to lend money. You might like to prepare a cash flow forecast for the first two years to see how much cash the business generates or requires.

Subject to what that shows I would suggest putting most of the money as loan capital. The interest rate and repayment terms should be put in writing as evidence that it is a loan. HMRC may require a copy of the loan agreement and you will have to justify the rate of interest charged so having a quote from a finance provider will help to demonstrate the rate is fair. If you later need to borrow you can always convert the loan into share capital. (The banks would insist on this anyway).

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