Private companies and close corporations often derive a large proportion of their finance from long-term loans made to them by director/shareholders or members.

If the loan bears interest, this is a cost to the company, albeit tax deductible, and this interest is fully taxable in the director's hands. If the loan is not interest bearing, as is normally the case, due firstly to the adverse tax consequences to the director, and secondly, to the cash flow strain to the company, inflation will reduce the real value of the loan.

Moreover, it is argued that a loan account usually forms part of the fixed capital of the company and it may often be difficult for a director to demand a return of his money, without seriously affecting the company's financial structure.

Accordingly, although a creditor director may have the right to reclaim his loan at any time, it may be many years before he is, in fact able to do so, without upsetting the long-term financial structuring of the company.
Bearing this in mind, the Credit Loan Scheme enables the director to withdraw his loan account from the company and invest it so as to achieve real capital growth. This is done by substituting himself with a financial institution as the lender. At the end of a predetermined term, usually five years, the director will reinstate his loan account with the company. This will enable it to repay the loan to the financial institution.

The director will have surplus funds at his disposal, being the difference between the original loan and the maturity value of the investment while still having a loan account with the company