When you’re in the early days of your business, you may find you have a bunch of initial costs you need to cover before you’re even generating an income from sales.
For a creative business, this could be anything from office equipment, to tech, to start-up accounting costs.
You may end up needing to use a Director’s Loan, or you may end up with a “Director’s Loan” and have no idea why it’s even there.
What is a director’s loan?
A director’s loan is when either an owner loans money to the business or a business loans money to the director.
Loaning your business money is an alternative to borrowing from the bank.
How do small businesses use director’s loans?
Sometimes the director’s loan is used as a pool.
Those first expenses are so frequent, money is going back and forth between you and the business, so you just need a place to collect those expenses.
What are the benefits of a director’s loan?
If your business needs funds and you are in the fortunate position to be able to provide them, as a Director you can do so.
This creates a Director’s Loan account.
It’s also possible to then charge interest on that loan.
The interest on a loan to your company can be used as a form of income for you personally. if you only take a small salary, as many business owners do, you may even be able to earn some interest tax-free.
It’s key to notice the word ‘may’ as there are criteria (but too boring for a blog). Basically, depending on other income, the interest you receive may be tax-free. (Get started with us to learn more about this.)
Is it ok to have a director’s loan?
There’s no problem with having a director’s loan except if you have an overdrawn director’s loan account.
When starting a business, it’s almost inevitable you will build up a director’s loan account, however, as with so many areas of running a business, it’s important to plan how you will extract money and meet your personal needs.
If you need help planning your own takings, talk to us about our Directors Remuneration Review. Starting with a zoom call and a quick fact find, we can check how you’re paying yourself and make sure you’re doing it in the most tax-efficient way.