7.17 It is often possible to agree that capital injection by the participants is in the form of a loan rather than through the issue of shares. The advantages of including some loans rather than pure shareholder or partnership equity include:
● interest and (if scheduled in detail) repayment of loan principal can provide a predetermined and clearly documented flow of cash back to the participants (if the cash is available);
● that they can be more tax-efficient; and
● that they are capable of being secured against the assets of the JV.
7.18 In the company context debt can be repaid even if there are little, or no, accounting profits as repayments of debt are not made out of distributable reserves. Partnership structures can provide more flexibility for returns on capital.
7.19 The servicing of a loan will typically have a priority call on the JV's financial resources, ahead of distributions of profits (depending on the details of the loan and shareholder/partnership documentation) so it is a less risky form of investment. Clearly, if an investment is agreed to be less risky it will typically attract a lower return. If the parties have different profiles of equity vs. loan investment this will inform the wider financial evaluation and negotiation processes.
7.20 As with external debt, participant loans will require appropriate internal procedures to ensure repayment obligations are adequately monitored and discharged.