What Is Reasonable Interest With A Business Loan?

What is a reasonable interest rate for a business loan?
Suppose you want to lend money to a business relation, friend or family member for business purposes. That is then a private business loan . A very important aspect of that loan is the interest rate and therefore the interest rate . You agree on that together.

You must record the agreements on the private loan in writing in a private loan agreement. You can use our model Business Loan Agreement for this. For example, if a director-major shareholder (DGA) borrows money from his private limited company (BV). Use the model Loan Agreement from, for example, the DGA for this. A reasonable / business interest must then also be determined. What is a reasonable interest rate and why is it important?

 

Interest rate

Interest rate

The premise is that an interest in any case is reasonable, as the interest rate is the same height as the interest that would require a bank or other lender for a similar loan. You can find those interest rates on the websites of the lenders. The case law also states that a reasonable or business interest rate is a maximum of 25% higher or lower than the interest that a bank would charge . You can find the bank rates on the websites of banks. You can use this to prove that the agreed interest rate is business.

 

Minimum interest and donation

Minimum interest and donation

The level of interest is not only important for the borrower and lender, but also for the tax authorities. The Tax and Customs Administration regards a private loan with a non-commercial interest rate as a gift , because there is no longer a question of a market rate or reasonable interest . It is therefore also wise to lay down agreements about the loan and interest in an agreement, so that you can demonstrate what the interest rate is.

If the interest rate is too low, there is a chance that one of the parties will have to pay a gift tax on the interest rate that is charged too little . However, you can donate tax-free up to a certain amount and you can therefore set a lower interest rate for loans below that amount. If the amount is lower than what can be donated annually tax-free, then of course no gift tax will be charged. You can read the amount of these exemptions on our sister website

 

Deductible interest

Deductible interest

It is also important for the interest deduction. The interest is only deductible if it is actually business. Read more about the business interest for borrowing money from your BV on the website of the Tax Authorities.