Financial Structure and Undercapitalisation of Private Limited Companies
The financial structure of private limited companies continues to show, frequently, a strong reliance on external capital to the detriment of equity capital. This reality, which is widespread within the Portuguese business environment – dominated by small and medium-sized enterprises – often results in situations of undercapitalisation, in which the company lacks a sufficiently robust financial base to support the risks inherent to the economic activity it pursues.
The freedom to set the share capital, combined with the limited liability of the shareholders, has contributed to the proliferation of companies with low share capital, often insufficient to absorb losses or withstand periods of economic instability. In this context, company financing tends to be secured, to a large extent, through external capital, including bank credit and loans granted by the shareholders themselves.
Shareholder Loans (“Suprimentos”) as a Corporate Financing Instrument
Among the financing instruments used by shareholders, suprimentos stand out. The suprimento agreement is a typical feature of Portuguese corporate law, widely used in practice, allowing shareholders to provide the company with financial resources of a permanent nature, even though they are recognised in accounting terms as liabilities.
Suprimentos offer clear advantages both for the company and for the shareholders. For the company, they ensure liquidity at critical moments, often in circumstances in which access to external financing is limited or excessively onerous. For shareholders, they make it possible to obtain a return on the capital invested through the payment of interest, without altering the structure of shareholdings or increasing the risk associated with limited liability.
Risks Associated with an Excessively Debt-Based Financial Structure
However, the excessive use of this type of financing is not without risks. A financial structure based too heavily on external capital weakens the company’s financial autonomy, undermines solvency ratios, and may hinder access to new credit. In addition, in times of crisis, the predominance of indebtedness increases the likelihood of default towards creditors and heightens the company’s exposure to insolvency scenarios.
Conversion of Shareholder Loans into Share Capital
It is against this background that the possibility of converting suprimentos into share capital gains particular relevance as a means of strengthening equity. The conversion of suprimentos essentially consists of a share capital increase by means of the entry of credits held by shareholders against the company. As a result of this operation, the credit is extinguished by merger of rights (confusão) and replaced by a shareholding in the company’s capital.
Economic and Accounting Impact of the Conversion of Shareholder Loans
From an economic and accounting perspective, converting suprimentos into share capital makes it possible to transform debt into equity, reducing liabilities and strengthening the company’s equity, which results in an immediate improvement of the company’s financial profile before creditors, financial institutions and other stakeholders, thereby contributing to greater credibility and increased capacity for future financing.
Conversion of Shareholder Loans as a Strategic Capitalisation Tool
The conversion of suprimentos therefore emerges as a particularly suitable solution for companies that, although economically viable, are excessively indebted and require reinforcement of their equity. By aligning the company’s financial structure with market requirements and with good corporate governance practices, this instrument becomes a relevant strategic option. Its considered use can thus play a decisive role in correcting situations of undercapitalisation, strengthening the financial soundness of private limited companies and promoting a more balanced capital structure that is better suited to pursuing the company’s business purpose.
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The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.