When you set up your business, there are many initial costs, like accountancy fees, insurance premiums, stationery, and website packages. To pay for all these costs, loaning money to your own company is a good idea while you are waiting for payment from your first client. Through a director’s loan, you can support your business.
It means to provide your own money to a limited company to support numerous projects and objectives. Though it is a helpful approach to provide funds, it is also a decision that must be properly examined and planned out. Therefore, you should be aware of the following things if you consider lending money to your limited company.
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Why would your Own Company require a Loan?
Your limited company would require a loan because of the following reasons:
- You are setting up your new company, maybe with the other directors, and you would like to provide some funding for the initial costs.
- Your company currently is not making a profit, and you want to invest some operating capital into it.
- You don’t have enough funds to pay for any asset or equipment right now, and you want to buy it through the company.
Check Legal Aspects before Loaning Money to Your Own Company
Before loaning money to your own company, double ensure that the company’s Articles of Association permits the company to take money from the directors and whether there are any restrictions on these loans imposed by the Articles. If you are unclear about what is allowed for your company by the Articles of Association, you should be aware of it before proceeding.
The next step is to make a loan agreement after ensuring that the loan is allowed. The loan agreement should specify the repayment schedule, size and date of the loan, and the agreed rate of interest.
What is a Director Loan Account?
The director can make a loan to the company in other forms, along with making in the form of cash. For instance, in case a director purchases goods, services, or equipment on behalf of a company, or if he forgoes payments of salary for a certain time, then this will also depict a loan to the company and must be documented in the DLA (Director’s Loan Account).
Can a Director Lend Money to a Limited Company?
Yes, a director can lend money to a limited company. It is preferable rather than taking a commercial loan from your bank. All loans are recorded in the director’s (loan) accounts. If a director borrows money from a limited company, it will also be recorded for accounting purposes in the director’s account.
Furthermore, it is useful to record all kinds of loans such as deferred salary payments, payments for goods or services, or cash loans directors make to the company. All these loans are documented in DLA as credits, and when the company files its annual legal accounts, they will be stated as current liabilities on BS (Balance Sheet).
The Key Point to Consider When Lending Money to a Limited Company
Following are the key points that need to be considered when lending money to a limited company.
- By making a director’s loan to your company, the amount (as a creditor) will be included on a company’s balance sheet.
- Your company can pay off the loan at any time if the director decides. Until the amount shown on the company’s balance sheet is fully paid, it will decrease.
- Ensure that there are enough funds in the company to encounter its current liabilities, e.g. tax, if you want the company to pay off the loan at any time.
- When thinking about any aspect of loaning money to your company and how you execute loan transactions, remember that limited company directors are required to always behave in the company’s maximum interests.
We will conclude our blog by saying that loaning money to your own company is preferable rather than taking a loan from the bank. There are several rules to consider while lending or borrowing money to your company. However, keeping in mind those rules, we can say that the director’s loan is a complex area and requires strict accounting and bookkeeping. So, make sure you have a professional for dealing with all the aspects of a director’s loan.
Disclaimer: This blog contains general information about lending money to your own company.