A director’s loan offers business owners the opportunity to access much-needed funds to help ease the concerns of a short-term problem like cash flow.
However, doing this can impact your business’s finances, so you must be sure that taking a director’s loan is the best approach to take and that it is managed effectively.
A director’s loan is when gives a business owner easy access to funds and, if managed well, can offer financial flexibility and a solution to an immediate problem that needs attention.
They may choose to take a loan from their company for several reasons, including investment opportunities and cash flow challenges. An internal loan also means they don’t have to seek support from external funding sources like banks.
A director’s loan can be a tax-free sum if the loan is paid back within the legal timeframes set by HM Revenue and Customs (HMRC).
As well as easy access to cash, you don’t need to complete a credit check and interest payments can be tax-deductible.
However, you will need to have a written loan agreement in place, even though it is an internal transaction within your company.
In addition to this, you also need to be documented in your company accounts to ensure all information is accounted for when submitting your returns to HMRC.
First and foremost, a director’s loan takes funds out of your business and any director loan you take is your responsibility and will need to be paid back to your company.
The timeframe for paying back a director’s loan is outlined in the Corporation Tax Act 2010, which specifies the implications you face should you not pay a loan back on time.
You will need to pay the loan back within nine months and one day. Failing to do so, means your company will be hit with an S455 tax bill. The bill is determined at a tax rate of 33.75 per cent of the loan’s outstanding value at the point of the loan deadline.
As well as the risk of a fine from HMRC, you also run the risk of damaging both your and your company’s credibility because your balance sheet will highlight the fact that the loan hasn’t been paid back.
This means your chances of borrowing from external sources are limited and any potential buyers and investors may also be reluctant, meaning any long-term plans of exiting the business will also be impacted.
You have to be sure a director’s loan is the right approach to take because while it does help you in the short-term, it could have a negative effect on your company in the long-term.
Director’s loans should only be explored if your options are running out. An accountant can help you find other solutions to avoid taking money out of your company.
Our expert team can help you paint a picture of your personal finances and your company’s financial health. From there, we can help you spot opportunities and decide if a director’s loan is the right option.
You’ll receive comprehensive advice and support that is tailored to your needs and ensures you can make informed decisions.
Get in touch with our team for all financial queries.
