Many small and medium-sized business owners utilise director loans to access valuable funds to help fix any short-term concerns, like cash flow issues.
Before taking a director’s loan, you have to be sure it’s the right path to take because you could seriously impact your company’s finances and your own future plans.
What are the advantages of a director’s loan?
When managed effectively, a director’s loan provides flexibility, solutions and a path to financial stability.
A director will take a loan out of their company to support any cash flow concerns, fund investment opportunities and manage any financial challenges without seeking external support.
A big appeal for many business owners is the ability to access funds quickly that are tax-free. This is within reason because there is a set deadline for a director’s loan to be repaid.
Other advantages of director loans include that cash can be accessed easily, you would not need to complete a credit check and any interest payments made on the loan could be tax deductible.
However, despite being an internal transaction, you are required to have a written loan agreement in place and be documented within your company’s accounts.
This is because you need to ensure all financial information is correct and accounted for when submitting your returns to HM Revenue and Customs (HMRC).
What are the potential challenges of a director’s loan?
If you do choose to take a director’s loan, you have to remember that this will impact your personal finances and you are taking away funds from your own business.
The loan will help you in the short term, but director loans are your sole responsibility, and you will need to pay them back to your company.
If left too long, you’ll face the tax implications under section 455 of the Corporation Tax Act 2010.
The act clarifies that a director’s loan must be repaid within nine months and one day of the company’s financial year end.
If a loan isn’t paid back within the timeframe, your company faces an S455 tax bill and which is taxed at 33.75 per cent of the loan’s outstanding value at the nine-month and one-day cut-off point.
Furthermore, not managing a director’s loan effectively can impact your company’s credibility and your own exit plans because outstanding loan payments will impact the company’s balance sheet.
Outstanding loan payments on your balance sheet will impact your ability to borrow cash from banks. This may also put off potential buyers and investors, leaving you in a position where you may need to rethink your exit plan.
Why speaking to an accountant will help you make the right choices
Director loans need serious consideration and planning, especially because you need to manage them effectively and put measures in place to ensure it doesn’t impact your company negatively.
An accountant will try to help you avoid a situation where you need to take a director’s loan, as it should be a last resort if you have no further options to explore.
We can help you assess your current financial plans and challenges to spot other avenues you could use instead of a director’s loan.
We can also discuss the overall financial health of your business and discuss with you whether taking a director’s loan is a viable option.
When you speak with us, you will receive comprehensive advice and support that is tailored to your needs and helps you build a picture of your finances.
We will give you the tools to make the right decision because you must be sure a director’s loan will benefit you and your business in the short and long term.
For expert financial advice and support, contact our team today.