Under prior law, it was necessary for the lender to lend directly to the plan. The loan would then be guaranteed and/or collateralized by the company. This type of loan structure frequently complicated the loan documentation. Under current law, this structure is no longer necessary. Under current law, the lender may now simply make the loan directly to the company. The company can then loan the money to the ESOP, provided that the ESOP uses the money to acquire voting common stock or voting preferred stock of the company. The advantage of this approach is that the lender can use the standard form of loan agreements and collateral agreements that he would use in the case of any corporate loan. It should be noted that the term of the loan from the company to the ESOP can be different from the term of the loan from the bank to the company. If, for example, the company wishes to allocate the shares over a longer period of time than the term of the bank loan, or the maximum deductible contribution amount is not sufficient to amortize the ESOP loan over the term of the bank loan, then the term of the company loan to the ESOP should be for a longer number of years than the term of the bank loan to the company.

It should also be noted that it is not always necessary to use an outside lender. If, for example, the company has accumulated funds under a profit sharing plan, these funds may be rolled over into an ESOP (subject to fiduciary considerations) and used to purchase company stock. In addition, if the company has excess funds, the company may itself be the lender. By using one or more of these sources of internal cash, the company may be able to reduce or eliminate the necessity of borrowing from an outside lender.

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