Rachel Lai – Insolvency Specialist
Sometimes a company needs a quick cash injection, directors’ loans are a valuable way for owner managers to lend money to the business, to be repaid in the future. But directors borrowing company funds to increase the size of their pockets, without repaying them swiftly, are at risk of coming unstuck if the business becomes insolvent.
Sourcing funds for the account
A Directors loan account records money lent to, or borrowed from, the company by its directors that aren’t a business cost, such as salary, dividend or expense payments.
For instance, if the organisation is having difficulty affording an important piece of equipment, the director might deem it appropriate to fund the asset personally, to boost business performance.
On the other hand, this can work the other way too. A director may decide to take out funds from the company by a loan, if they are dealing with personal cash-flow difficulties. They’d need this especially if their ability to make mortgage payments is affected.
If the business then becomes insolvent and there is a balance payable on the director’s loan account, then the amount left can be chased by an insolvency practitioner against the director personally.
An individual’s personal finances unavoidably go through ups and downs, exactly like a company’s cash position. Therefore, an owner manager might decide to borrow funds from the business. Even so this is understandable, directors need to be conscious that, like with a commercial loan, the debt will have to be repaid.
Receiving professional advice is also vital. For example, a loan made to a director who is also a shareholder, which is outstanding nine months after the company’s yearend, could be responsible for Corporation Tax at a rate of 32.5 per cent. Moreover, there could be effects on the individual’s personal tax position. Understanding these rules around borrowing cash from the business would help to maximise profit margins and evade any unwanted, nasty surprises.
Carefully record transactions
When using directors’ loan accounts, a thorough approach to recording transactions is crucial. By taking the initiative to balance the books at the earliest convenience, directors optimise this valued cash-flow tool, whilst also safeguarding their own financial position.