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Effect of loan on ability to pay dividends?

Limited company has regular monthly income and the usual reserves calculation shows it can pay another dividend next month to the owner/directors.

A loan has just been received from the bank, repayable over 3 years, and has been used to purchase the goodwill of another business. Do the loan or repayments affect the reserves calculation, and hence the amount that can be paid in dividends.

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10th Mar 2011 16:56

No

... unless it is a condition of the bank loan that dividends are restricted or even, prohibited, until the loan has been repaid.

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11th Mar 2011 09:36

More to consider

No disagreement with Euan, but you also need to consider what will hit the P&L as a result of the loan and its use. Amortization of goodwill and interest on the loan come to mind.

Not sure if that was behind your question so apologies if I have the wrong end of the stick.

-- Kind regards Andy

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11th Mar 2011 11:18

Thanks Euan & Andy

I was mainly interested in the direct issue answered by Euan so that dividends can be paid. Our accountant will deal with the issues Andy raised in due course.

In the meantime, I would appreciate any further details you could give me on "what will hit the P&L as a result of the loan and its use.".

Reagrds, George

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