Lending money to a limited company
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Shoring up growth and retaining a competitive advantage is a constant struggle that every business owner must contend with. Yet regardless of whether you’re the founder or a shareholder, one way of supporting your business’ future is through a Director’s Loan. This essentially means offering your own money to a limited company, giving it the strength and means to support any number of key projects and goals, whilst also charging interest. However, although a useful way of providing funds, it’s also a decision that needs to be carefully considered and planned out. So if you’re thinking about lending money to your limited company, this what you need to be aware of.
Why should I lend money to a limited company?
Whether you are the founder or a shareholder in a start-up/established limited company, lending your own capital could be a useful way of supporting a wide range of essential projects, whilst also generating a return through the application of interest. As such, this could be the capital that you’ve taken from your personal savings, existing employment or even through a Director’s Loan (arranged with another company you’re involved with). Therefore, because you are lending the capital, there’s no limit to what you can provide or what it can be used for. Nevertheless, understanding the advantages and disadvantages of this path is vital for deciding on whether is an appropriate course of action for your business.
What are the advantages of lending money to a limited company?
One of the biggest advantages of deciding to lend money to a limited company is that you, and any other directors/shareholders involved, don’t need to give away any more equity (shares) in the business - unlike Crowdfunding, Venture Capital or Angel Investment. As such, the business’ current structure remains unchanged, without adding any more shareholders than what there is already.
Plus, since it’s your capital, you’re in control of how much you provide and what it can be used for. As such, by lending money to your own limited company, you can support any number of vital projects that could be in the pipeline - from growth, innovation, working capital expenses or uneven cash flow to a cash injection. In addition, you’re also in control of the length of the agreement (term) and when you eventually get repaid. Naturally, you’ll want to get your money back as soon as possible, but this needs to be carefully considered alongside your business plan and Cashflow Forecast. How much can the business comfortably afford? What repayment scheme will you use (e.g. Fixed or Flexible Monthly Repayments)? Could the business benefit from hanging on to capital for a longer duration, and how much interest can you expect to earn on your investment?
Finally, another advantage of lending money to a limited company is that you’re free to charge whatever rate of interest you like - if at all. However, if you do decide to charge interest, you should do so with moderation. Charging an excessive amount of interest could prove crippling for the business, forcing it to take on a rising amount of debt that could affect its ability to grow and keep up with other operating expenses.
What are the disadvantages of lending money to a limited company?
Nevertheless, despite being a great way of providing funds to a limited company you’re associated with, there are drawbacks that must be observed as well. For one, any interest that you earn from this arrangement must be reported in a Self Assessment form to HMRC, regardless of the amount earned falls below the threshold. So, if you’re classed as a basic rate taxpayer, you can take at least £1,000 each year through interest before having to pay income tax. However, if you are considering lending money to a limited company, you should consult the advice of a qualified business accountant or advisor before going ahead.
In addition, you also need to be aware of the implications that may be involved if you’re placing a large amount of capital into the business, especially if it exceeds what other directors or shareholders are putting forward - if anything. So in order to safeguard your investment, you could use this to also argue for a larger shareholding in the business which is proportionate to your contribution and acknowledged in a written legal agreement.
This is because if you decide to eventually sell up, you’ll gain the same amount of capital back as any other directors or shareholders - assuming you all have an equal share in the business. So although business sales usually result in the resolution of all debts incurred by the company’s directors on account of the proceeds, you could be missing out on the chance to generate a larger return on your investment.
However, if you don’t decide to eventually sell the business but want to earn a return on your investment, getting hold of share capital can be a long and drawn out process, involving a lot of paperwork. As such, charging the company interest could make it easier to regain your capital and earn a return. But having to make regular repayments will put additional strain on its finances.
The Alternative Finance Industry
Although lending money to a limited company does have its merits, there are a number of challenges involved as well. However, if you are seeking to invest in the future of your business but want to explore a different path, you could take a look at what the Alternative Finance Industry has to offer. Granting access to a new generation of business finance products and lenders, the Alternative Finance industry is providing more and more business owners with the opportunities they need to succeed. If you are able to support a variety of different financial situations, all you need to do is source a suitable finance agreement for your limited company’s goals.
Need help supporting your limited company?
For your business to grow and achieve a sustainable future, having access to a sufficient amount of capital is vital. Yet despite the necessity, capital isn’t easy to find. As such, you may be tempted to invest your own capital in the business, possibly as a loan. However, there are a number of factors to be taken into account. As such, taking a look at what the Alternative Finance Industry has to offer, this could be a more appropriate pathway to take. All you need to do is source a suitable finance agreement for your business from a lender you can trust - which is where we can help.
At Rangewell, we’re an Access to Finance specialist who’s mapped over 400 lenders to offer you a complete overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you throughout the application process. So if you’re looking to invest in your business’ future, apply for Alternative Finance today or find out more with Rangewell.