Insider Loans: What They Are and How to Spot Trouble

Ever seen a company lend cash to its CEO, a director or a big shareholder and wondered if that’s normal? That’s an insider loan — and it can be harmless or a big warning sign. This short guide shows you how to read disclosures, spot red flags, and act if something smells off.

Insider loans are simply loans made by a company to people or entities closely connected to it: executives, board members, family, or related companies. Regulators call these related-party transactions. They can fund growth or bridge cashflow, but they also carry conflicts of interest when terms aren’t arm’s-length.

Quick red-flag checklist

Watch for these specific warning signs before you panic, and use them to ask smart questions:

• Unusually low interest or no repayment schedule — looks like a gift, not a loan.
• Loans to shell companies owned by directors or family members.
• Large size relative to company equity or cash on hand.
• No board or audit committee approval in filings or minutes.
• Repeated rollovers instead of real repayment.
• Loan forgiveness or related-party guarantees that shift risk to minority shareholders.

Each item matters. One small loan might be fine. Multiple items together are a real concern.

How to check and what to ask

Start with published documents: annual reports, financial statements and notes, and any stock-exchange filings. Look for “related party” disclosures — they must show the amounts, interest rates, collateral and approvals. If you don’t see details, ask for them.

Ask clear questions: Who approved the loan? Was the interest rate market-based? Is there collateral or a repayment plan? Were independent directors or an audit committee involved? If answers are vague, push for an independent review.

If you’re an investor, attend the AGM or submit written questions. If you’re a journalist or analyst, request copies of board minutes or contracts. In many countries you can file a formal complaint with the regulator — in South Africa that could mean the FSCA or the Prudential Authority depending on the company type.

Governance controls that reduce risk are simple: clear policies on related-party lending, independent board oversight, external audit checks, and mandatory public disclosure. Companies with these controls usually manage insider loans transparently and safely.

Real-world example (brief): a firm lends operating cash to a supplier owned by a director at below-market rates. If the supplier fails, the company may lose both cash and objectivity in future contracts. That’s why transparency and independent approval matter.

If you suspect abuse, collect documents, note dates and amounts, and report to the company’s audit committee or the relevant regulator. For investors, consider voting against re-election of non-independent directors tied to questionable loans.

Insider loans aren’t always illegal, but they demand scrutiny. Read disclosures, ask specific questions, and use governance tools to protect your stake. That’s how you turn a hidden risk into a manageable one.