What is a Director’s Loan Account and What are the Benefits?

When you are early on in your journey of running a small business, there may be various pieces of legislation or 'tax speak' that you do not understand. Director's loan accounts (DLAs) are something that your accountant might suggest or something you might see on your company accounts. In this blog, we explain exactly what a director's loan account is and the benefits for a small business.

In the early stages of a start-up, the lines between personal finances and the company's finances can be blurry. Especially before a business has had the chance to set up separate business banking facilities, or an individual has made the switch from being self-employed to running a limited company. In the early period a small business can require additional funding from it's director/s too. Using a DLA is a good way of having a clear, transparent account of financial exchanges between your personal and business account.

What is a Director's Loan Account?

A director's loan account is how you keep track of money that you either borrow from or lend to your business. It only applies to a Limited Company.

Money in your limited company bank account belongs to the company, however, as a director of the company, you can make withdrawals using a director's loan. Your company can set the interest rate on the loan, however, if it is charged below the official rate, then you may be taxed on the difference. Speak to an accountant to make sure you are not falling foul of HMRC in this regard!

There is not a legal limit to how much you can borrow, however you should very carefully consider affordability and whether this is the best option. Any loan of over £10,000 will be treated as a 'benefit in kind' and must be reported on your tax return.

It is important to understand that a director's loan should not be confused with paying yourself a salary, dividends, or reimbursing expenses.

The Benefits of a Director's Loan

A director's loan account can provide several benefits for small businesses, particularly those with closely held or limited company structures. Here are some of the advantages of using a director's loan account:

1. Easy to Access
   Directors can use the loan account to access funds at any time. Having direct access to your company bank accounts means that you can make quick, flexible, and easy transfers.
2. Tax Efficient
   Providing that the director's loan is managed in the right way, it can offer fantastic tax advantages. Potentially borrowing up to £10,000 without being liable for tax. (However, temporary tax charges will apply, and this is subject to loan being repaid within a certain period – so best to seek advice before taking a large loan).
3. Cashflow Management
   If a company is going through a tricky patch and needs funds, directors can lend money to the company to boost cashflow and the company can repay the loan when it has surplus cash. This can be useful when start-ups or small businesses have issues with unpaid invoices, or an unexpected cost pushes them into the red.
4. Personal Investment
   Director's loans allow them to personally invest funds into their business which can be advantageous for growing the company without diluting ownership or taking on external debt.
5. Transparency
   Maintaining a director's loan account ensures a clear record of the transactions between the director and the company, without entangling money between various banking or savings accounts.

Advice From Your Accountant

It is crucial to note that director's loan accounts can also pose risks and complications if not properly managed. Understanding the tax implications for both the company and the director can be tricky.

Using a director's loan account can assist SMEs to make the most from their business, however, businesses should seek specialist advice from their accountant when dealing with director's loans to ensure that the correct and most suitable process is being followed, and that they can be confident in their tax compliance.

For further information on managing your small business accounts, then please get in touch with our friendly and forward-thinking accountants at Giltinan & Kennedy. Call us on 01403 337490 or email us at info@giltinan-kennedy.co.uk.