There are a lot of costs that come up when you first start your business, such as accounting fees, insurance payments, 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. You can help your business by getting a director’s loan.
Giving your own money to a limited company to help with many projects and goals is what it means. Giving money is a good idea, but it’s also a choice that needs to be carefully thought through and planned. Because of this, here are some things you should know if you want to lend money to your limited company.
Why Would Your Own Company Require a Loan?
Because of these things, your limited company would need a loan:
- You are starting a new business, maybe with the help of other owners, and you’d like to help pay for the start-up costs.
- You want to put some running cash into your business even though it’s not making a profit right now.
- You’d like to buy something through the company but don’t have enough money to pay for it right now.
Why Should I Loan Money to a Limited Company?
This is true whether you are the founder or a co-owner in a new or existing limited company. Loaning money to your own company could be a good way to help with many important projects while also making money through interest.
In this case, the money could come from your own funds, your current job, or even a Director’s Loan that you got from another business you work with. Since you are lending the money, there are no limits on what you can do with it or how much you can give. Still, it’s important to know the pros and cons of this road before choosing if it’s the right one for your business.
Advantages of Loaning Money to Your Own Company
When you loan money to a limited company, you and any other owners or shareholders don’t have to give up any more stock (shares) in the business. This is one of the best things about it compared to Crowdfunding, Venture Capital, or Angel Investment. Because of this, the current organisation of the business stays the same, and no more owners are added.
Plus, you decide how much to give and what it can be used for since it’s your cash. So, if you lend money to your own limited company, you can support a wide range of important projects that might be in the works, such as growth, innovation, working capital costs, or an uneven cash flow. You also decide how long the deal lasts and when you get paid back. You’ll want your money back as soon as possible, but this needs to be carefully thought through along with your Cashflow Forecast and business plan. How much money does the company have to spare? What kind of payment plan do you want to use (for example, fixed or flexible monthly payments)? Would it be good for the business to keep the money for a longer time? How much interest can you expect to earn on your investment?
Finally, one more good thing about lending money to a limited business is that you can charge any interest rate you want if any at all. If you do decide to charge interest, though, you shouldn’t do it too often. If the business charges too much interest, it might have to take on more debt, which could make it harder for it to grow and pay its other costs.
Disadvantages of Loaning Money to Your Own Company
Still, even though it’s a good way to give money to a limited company you’re involved with, there are some things that should be kept in mind. For starters, you have to tell HMRC about any interest you earn from this plan on a Self Assessment form, even if the amount you earn is less than the cutoff. If you pay the basic rate of tax, you can take at least £1,000 in interest every year without having to pay income tax. But if you want to give money to a limited company, you should talk to a skilled business lawyer or expert first.
That being said, you should know what might happen if you put a lot of money into the business, especially if it’s more than what the other owners or shareholders are putting in, if anything. To protect your investment, you could also use this to make a case for a bigger part of the business that is fair for what you’ve done and is spelt out in a written contract.
You’ll get the same amount of money back as any other director or shareholder if you decide to sell up in the end, as long as everyone has an equal stake in the business. Therefore, even though selling a business generally clears all of the directors’ bills with the money from the sale, you might be missing out on the chance to get a bigger return on your investment.
You may have to go through a lot of paperwork and wait a long time to get share capital if you don’t plan to sell the business but still want to make money on your investment. Because of this, charging the company interest might help you get your money back and make a profit. However, having to make regular payments will put more stress on its funds.
Check Legal Aspects Before Loaning Money to Your Own Company
Before Loaning money to your own company, make sure that the Articles of Association of the company allow the company to borrow money from the owners and that the Articles don’t put any limits on these loans. If you’re not sure what the Articles of Association say your business can do, you should find out before going any further.
After making sure that the loan is legal, the next step is to make a loan deal. The loan deal should include the decided rate of interest, the due date, the amount of the loan, and how it will be paid back.
What is a Director Loan Account?
The director can lend money to the business in more than one way, not just cash. For example, if a director buys goods, services, or tools for the company or opts not to get paid for a while, this is also considered a loan to the company and needs to be recorded in the DLA (Director’s Loan Account).
Can a Director Lend Money to a Limited Company?
A director of a limited company can give money to it, yes. Instead of getting a business loan from your bank, this is better. The director’s (loan) records keep track of all payments. It will be listed in the director’s account for financial reasons if they borrow money from a limited company.
It’s also a good idea to keep track of all loans, like salary payments that are put off, payments for goods or services, and cash loans that leaders give to the company. The debts are all listed as credits in DLA. They will be listed as current liabilities on the company’s yearly legal accounts, which will be filed with the government.
The Key Point to Consider When Lending Money to a Limited Company
When you lend money to a limited company, here are the most important things you should think about.
- By making a director’s loan to your company, the amount (as a creditor) will be included on the company’s balance sheet.
- If the director wants, your business can pay back the cash at any time. The amount on the balance sheet of the company will go down until it is fully paid off.
- If you want the company to be able to pay back the loan at any time, make sure it has enough cash on hand to cover its present debts, like taxes.
- When you think about loaning money to your business and how you handle loan deals, keep in mind that limited company owners must always act in the best interests of the company.
Quick Wrap-Wp
At the end of this blog, we will say that Loaning money to your own company is better than borrowing money from a bank. When giving or taking money from your business, there are a few rules to keep in mind. But with those rules in mind, we can say that the director’s loan is a tricky subject that needs careful tracking and accounting. That’s why you should have a professional handle all the parts of a director’s loan.
