A director’s loan is created when you or a member of your close family draw money from your business that is not accounted for in other ways. If you do this, you have to keep strict records and this is known as a director’s loan account. Let’s take a look in more detail at both director’s loans and the associated accounts.
What is a director’s loan?
These loans cover a situation where you draw money from your company and this is not either a repayment of money you have loaned or paid into the business and is not expenses, a dividend, or a salary payment.
It is also classed as a director’s loan if you lend money to your company. For example, to solve short-term cash flow issues or to cover start-up costs. In this case, the director then becomes a company creditor.
When might director’s loans be needed?
This type of loan could allow you to access extra funds to cover one-off expenses such as unexpected bills or short-term funding shortages.
These do come with risks, however, such as potentially high tax penalties, and are admin-heavy. This is why it is always essential to get professional advice from specialists such as Parachute Law before deciding that a director’s loan is the right choice for you.
As explained on the government website, it is your obligation to keep records of money you either may introduce to or borrow from your company. As described above, a director’s loan account or DLA is the usual name for this record.
The DLA can either be overdrawn or in credit. The latter is the case if the business is lending less than it is borrowing from the director or directors.
Company shareholders and other creditors can become concerned if a director’s loan account is overdrawn for extended periods. It should be at zero or in credit for most of the time.
Repaying a director’s loan
Director’s loans have to be paid back within nine months and a day of the business’ year end. If this is not done, then there will be a tax penalty.
Unpaid amounts will be subject to S455 tax, which is corporation tax charged at 32.5 per cent. This can be claimed back when the loan is repaid but this can take a long time.
Borrowing money as the director of a business has a range of pitfalls, not least that you may be personally liable for company debts if you have committed to a director guarantee.
Signing such a guarantee declares that you will personally cover the debts of the business. This type of guarantee is often required in business transactions, especially when large sums of money are involved, and in most cases it will not create an issue. However, guarantees can have grave consequences for a director if the firm enters liquidation or goes into administration. You should always seek professional legal advice before committing to any form of guarantee.