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A Loan Policy is a formal governance document that defines the rules an organization follows whenever it extends or receives a loan β covering approval authority, borrower eligibility, required documentation, interest-rate floors, collateral requirements, related-party lending controls, and write-off authority. Unlike an individual loan agreement, which records the terms of a single transaction, a loan policy establishes the organizational framework that governs every lending decision the organization makes. It ensures that loans are approved at the right level, documented before funds are released, priced above the IRS Applicable Federal Rate, and reported to the board on a consistent schedule.
Without a written loan policy, lending activity inside an organization becomes ad hoc and undocumented β creating four concrete risks. First, undocumented loans to officers or shareholders are routinely reclassified as taxable compensation on audit, resulting in back taxes and penalties for both the organization and the recipient. Second, loans made below the IRS Applicable Federal Rate trigger imputed-interest income without anyone on either side realizing it. Third, related-party loans approved without independent oversight expose directors and executives to self-dealing allegations that can void the transactions entirely. Fourth, write-offs taken without documented collection efforts cannot support a bad-debt deduction for tax purposes, turning a loss into a disallowed expense. A clearly adopted loan policy, reviewed annually and applied consistently, closes all four gaps β and signals to auditors, lenders, and regulators that the organization's financial governance is credible and controlled. This template gives you a complete, editable starting point you can adapt, adopt by board resolution, and put into practice the same day.
| If your situation is⦠| Use this template |
|---|---|
| Governing loans extended to employees or staff | Employee Loan Agreement |
| Documenting a specific loan between two parties | Loan Agreement |
| Setting terms for a shareholder or owner loan to the company | Shareholder Loan Agreement |
| Establishing a revolving credit facility for internal business units | Credit Policy |
| Controlling how the organization extends credit to customers | Credit and Collections Policy |
| Documenting a promissory note for a specific loan obligation | Promissory Note |
| Managing third-party vendor payment terms and advance arrangements | Vendor Payment Policy |
Why it matters: A rate that was above the AFR when the policy was adopted can fall below it if the AFR rises, creating imputed-interest income for the borrower and a reporting obligation for the organization.
Fix: Define the floor as 'the current IRS short-term Applicable Federal Rate at the time of disbursement' and require the CFO to document the applicable rate for every loan issued.
Why it matters: Treating officer and director loans identically to employee advances bypasses the independent-approval and disclosure requirements that protect the organization from self-dealing allegations and regulatory penalties.
Fix: Create a standalone related-party lending section with mandatory board approval by disinterested directors, arm's-length pricing, and annual financial-statement disclosure.
Why it matters: Once funds are released, borrowers have no incentive to return paperwork; missing files are the most common finding in internal audits of lending programs.
Fix: Make a completed, signed pre-disbursement checklist a hard prerequisite for releasing funds, with the approving officer's signature confirming the file is complete.
Why it matters: Writing off a loan without documenting collection efforts eliminates the evidence needed to support a bad-debt deduction for tax purposes and exposes the organization to questions about whether the write-off was authorized properly.
Fix: Require a written summary of collection steps taken β demand letters, payroll deduction attempts, legal review β before any write-off authorization is valid.
Why it matters: Routing a $300 payroll advance to the board for approval makes the policy unworkable; staff will bypass it, creating undocumented loans that surface only during audits.
Fix: Build at least three tiers β manager, CFO, and board β with specific dollar thresholds calibrated to your organization's actual transaction volume.
Why it matters: Without a fixed reporting cadence, delinquent loans are discovered late, recovery is harder, and the board has no visibility into the organization's credit exposure.
Fix: Require the CFO to present a written loan portfolio report at every quarterly board meeting, covering outstanding balances, payment status, and any past-due accounts.
Name the legal entity the policy covers and list every loan type in scope β employee advances, shareholder loans, intercompany lending. Then explicitly list what is excluded, such as trade credit or operating-lease obligations.
π‘ A clear exclusion list prevents scope disputes during audits far more reliably than a broad inclusion statement.
Create at least three tiers β manager, CFO, and board β with dollar ranges for each. Ensure the thresholds reflect your organization's actual transaction sizes so the policy is used in practice.
π‘ Set the board-approval threshold 20β30% above your largest likely single loan, so routine transactions don't require a special board meeting.
State minimum tenure, employment status (permanent vs. contract), and any automatic disqualifiers such as active disciplinary proceedings or prior loan defaults with the organization.
π‘ Run this section past HR before finalizing β eligibility rules that conflict with employment policies create grievance risk.
Enumerate every document required before a loan is funded and build it into a checklist that the approving officer signs. Common items: signed loan agreement, promissory note, proof of purpose, and collateral documentation.
π‘ Attach the checklist as a policy appendix rather than embedding it in the body β it is easier to update independently as requirements change.
State the minimum rate as 'the short-term IRS Applicable Federal Rate for the month of disbursement' rather than a fixed percentage, so the policy stays compliant as rates change.
π‘ Task the CFO to document the AFR on the date of each disbursement and attach it to the loan file β this is the primary evidence in an IRS audit of below-market loan claims.
State the loan size above which collateral is required, the minimum LTV ratio, and acceptable collateral types. Include a requirement that a UCC-1 financing statement or equivalent lien be filed before disbursement for secured loans.
π‘ Never rely on a promise to provide collateral after disbursement β by that point there is no practical way to enforce it without suing the borrower.
Draft the related-party section after all other sections are finalized so you can cross-reference the standard terms. Require independent director approval and annual financial-statement disclosure for all related-party loans.
π‘ For nonprofits, mirror the language from IRS Form 990, Part VI, Schedule L β it will satisfy the form's disclosure requirements directly.
Present the completed policy to the board for formal adoption by resolution, record the adoption date, and set a calendar reminder for annual review β particularly to update the AFR reference and approval thresholds.
π‘ Version-control the policy with a header showing the adoption date and next scheduled review date so auditors can confirm it is current.
A loan policy is a formal governance document that defines the rules an organization follows when extending or receiving loans. It specifies who can authorize a loan, what documentation is required before disbursement, how interest rates are set, what collateral is needed, how related-party loans are controlled, and who holds authority to write off uncollectable amounts. The policy creates a consistent, auditable framework that protects the organization from undocumented lending and potential tax or regulatory exposure.
Any organization that regularly extends loans to employees, shareholders, or affiliated entities needs a documented loan policy. This includes credit unions, nonprofits (which face IRS scrutiny on related-party transactions disclosed in Form 990), small businesses that advance funds to owners or shareholders, and companies with intercompany lending arrangements across subsidiaries. Even organizations with infrequent loan activity benefit from a policy to prevent ad-hoc, undocumented transactions.
A complete loan policy covers: purpose and scope, approval authority tiers with dollar thresholds, borrower eligibility criteria, pre-disbursement documentation requirements, an interest-rate floor linked to the IRS Applicable Federal Rate, collateral requirements and security interest perfection, enhanced controls for related-party lending, periodic monitoring and reporting obligations, default procedures with cure periods, and write-off authority with documentation requirements.
The Applicable Federal Rate (AFR) is the minimum interest rate the IRS publishes monthly for loans between related parties. If your organization charges less than the AFR on a loan, the IRS treats the difference as imputed interest β creating taxable income for the borrower and a reporting obligation for the lender. Setting your loan policy's interest-rate floor at or above the current AFR, and documenting it at the time of each disbursement, is the primary protection against imputed-interest findings on audit.
For most organizations, yes. Board adoption provides the policy with organizational authority and creates a clear record that governance over lending activity has been formally established. For nonprofits, board adoption is particularly important because the IRS Form 990 asks whether the organization has a written policy governing loans to or by officers and directors. Documenting the adoption date and version is good practice for audit readiness.
An annual review is standard, and it should be triggered earlier whenever the IRS adjusts the AFR significantly, approval thresholds become misaligned with actual transaction sizes, or the organization starts a new type of lending program. Version-control the policy with an adoption date and next-review date in the header so auditors can confirm the document is current.
Yes, and it should. Many organizations focus only on loans they extend to employees or related parties, overlooking the governance of loans they receive from shareholders, owners, or affiliated entities. Both directions of lending create documentation, interest-rate, and disclosure obligations. A well-drafted scope section explicitly covers both outbound and inbound loans.
Without a policy, lending decisions are made informally and inconsistently. Common consequences include undocumented loans that are reclassified as taxable income on audit, related-party loans that trigger self-dealing findings, write-offs that cannot support a bad-debt deduction for lack of documentation, and board members who are unaware of the organization's credit exposure. Auditors and lenders routinely flag the absence of a written loan policy as a governance deficiency.
A loan agreement is a transaction-level document that records the specific terms of a single loan between named parties β amount, rate, repayment schedule, and remedies. A loan policy is an organizational governance document that sets the rules all loan agreements must follow. You need the policy to govern how agreements are made, and the agreement to document each individual transaction.
A credit and collections policy governs how the organization extends credit to customers in the ordinary course of trade β payment terms, credit limits, and collections procedures for overdue receivables. A loan policy governs formal lending arrangements, typically to employees, shareholders, or related entities, with interest rates, collateral, and write-off authority. The two documents cover different transaction types and usually sit in different parts of the finance manual.
A promissory note is the borrower's written promise to repay a specific sum under defined terms β it is the legal instrument that creates the debt obligation. A loan policy is the internal governance framework that determines when and how promissory notes may be issued. The policy mandates the note; the note evidences the loan.
A finance policy covers the full spectrum of financial controls β budgeting, expenditure authority, banking arrangements, and reporting. A loan policy is a focused subset addressing only lending activity. Organizations with a comprehensive finance policy may embed loan rules within it, but separating them into a standalone document is better practice when lending volume or complexity warrants dedicated governance.
Member loan approval criteria, NCUA or state banking regulator compliance, and tiered approval authority aligned to lending limits.
IRS Form 990 Schedule L disclosure requirements, related-party controls for officer loans, and program-related investment documentation.
Intercompany loan governance, transfer-pricing compliance for cross-border advances, and treasury policy alignment.
Shareholder and owner loan documentation for lender due diligence, payroll-advance programs, and write-off authority for the CFO or owner.
| Path | Best for | Cost | Time |
|---|---|---|---|
| Use the template | Small businesses, nonprofits, and organizations with straightforward employee or shareholder loan programs | Free | 2β4 hours to customize and adopt |
| Template + professional review | Organizations with related-party lending, cross-border intercompany advances, or audit-sensitive environments | $300β$800 for a CFO or accountant review | 1β3 days |
| Custom drafted | Regulated lenders, credit unions, or enterprises with complex multi-entity treasury structures requiring regulatory alignment | $1,500β$5,000+ | 2β4 weeks |
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