As inflation and other costs rise, running a business is more costly so lending money to your limited company might be worth considering.
If you need new equipment or the business needs help with stock, accessing finance from a lender is the obvious solution. But with rising interest rates and tougher lending criteria, some business owners may prefer to avoid adding to their cost burdens.
We’ve looked at a limited company loaning money to a director before (here’s our blog on directors’ loans). But what about a director loaning money to a business?
Lending money to your limited company
There are many ways in which a limited company may need a loan to tide it over. This includes:
- During start-up for initial funding.
- Your limited company is making a loss and needs an injection of capital.
- You require equipment or another type of asset and there are not sufficient funds at the moment but will be.
- Can directors lend money to a limited company?
Directors certainly can lend money to a limited company and, as mentioned, many directors may prefer to do that rather than applying for a loan from a bank.
Loans are recorded in the company directors’ loan for accounting purposes.
You should create a loan agreement between the director or directors and the limited company. This is because they are distinct legal entities. The agreement should detail:
- How much is being loaned
- Interest rate
- Any terms
- Other conditions
While there is no legal obligation to do this, it creates a useful paper trail especially if HMRC investigates your accounts in future.
Check, also, your Articles of Association as they may prevent loans being made from company directors. It’s unlikely if you have used model formation documents but you must check this before making a loan.
Can you charge interest?
A director who loans money to a limited company can charge interest. The rate is up to you, but as it’s an unsecured loan a commercial rate of interest would be fair.
But think carefully before deciding whether to charge interest. You don’t want to end up with the company being stuck with unreasonable interest rates that affects cash flow.
If you choose to charge interest, the interest payments are just like any other loan. As a result, they are tax-deductible against the company’s Corporation Tax bill.
The company will need to submit form CT61 each quarter to HMRC detailing the amount of interest charged. It must then deduct 20% basic rate tax from the interest payments before it is paid to the director.
Directors making a loan must include any interest received on their annual self assessment form.
Other points to remember
If you’re a director lending to a company, you must include the amount on the company’s balance sheet as a creditor.
Should the directors agree, the company can repay a loan at any time. This amount should show on the balance sheet and reduced until fully paid.
When loaning money to your company, remember you are legally obliged to act in the best interests of the company. It would not be in the interests of the company, therefore, to demand repayment in full if it means there isn’t sufficient funds to pay ongoing liabilities, such as tax.
Making a decision
If you’re unsure about whether to offer a loan to your company or are unsure of any aspects, then speak to an accountant. You can arrange to talk to our team about your business finances without obligation today by filling in our contact form below.