What Is A Director’s Loan Account?
A director’s loan account is the account or ledger through which each and every transaction between a company and its director flows. A director’s loan account provides the accounting mechanism whereby a director and a company know where they financially stand with one another.
A common misconception is that company transactions must flow through a company’s bank account. It is conceivably beneficial that company transactions are kept separate from non-company transactions but in reality in many SMEs there might be many transactions that do not follow that pattern of perfect segregation.
Even if separation is not strictly observed what must be strictly observed is the avoidance of conflating the transactions of the company with the transactions of the director personally. This is where we welcome you to the world of the director’s loan account. A world in which transactions between a company and a director might never pass through the company’s bank account.
Director’s Loan Account Or Director’s Account?
The name director’s loan account could be instead called director’s account. The insertion of the word “loan” is perhaps unnecessary. By convention, the word is included. It is effectively the director’s account with the limited company.
In every set of company accounts there is a director’s loan account.
It can be overdrawn if the director owes money to the company, much in the same way if someone is overdrawn at the bank. This is an overdrawn director’s loan account.
It can be in credit if the director is owed money by the company or it can be neither overdrawn nor in credit if the neither party owes the other any money.
How A Director Might Lend A Company Money
Directors may lend a company money in three ways:
- Direct transfer from a director’s personal bank account to the company’s bank account.
- Making payments from their personal account to make a purchase for the company’s benefit.
- Delaying the drawing of their entitlement to funds from the company.
Example Of A Director Lending A Company Money
When a company starts trading a director might put money into the company so it can purchase supplies needed. For example, a director might have an Amazon account and the company might not have set one up but the company might need some print toner to enable it to send marketing letters out to potential customers. As a result, the director may use their personal Amazon account to acquire some toner for a printer that is used for the benefit of the company.
If the print toner is exclusively used for the benefit of the company then the director will be entitled to claim the full cost from the company. This will increase the amount the company owes them or reduce the amount they owe to the company depending upon the state of their director’s loan account.
Delaying Drawing Entitlement To Company Funds
When a director works for a company they will often be employed by the company. In such an event they will have an employment contract that typically entitles them to a regular income as with any other employee.
So if a director is paid every month a salary they have two choices they can either run their salary through the payroll and pay their wages as with any other employee or they can instead depending on the company’s cash flow position, delay the withdrawal of their salary entitlement. They still need to record on the payroll the salary entitlement and pay over the relevant amount of PAYE and National Insurance each month. However, if they opt to delay the withdrawal then instead the salary entitlement is recorded on their director’s loan account as an amount owing to them which as yet is unpaid.
Exactly the same procedure can be deployed in an owner managed business if a director is also a shareholder who for reasons such as tax efficiency may decide to take some of their remuneration in the form of dividends. Although it is not remuneration, in the minds of many directors it is often likely considered to be the same thing or something similar. Nevertheless, the entitlement to drawing the dividend can be processed in the same way and delayed if the director so decides.
How Might A Company Lend A Director Money?
Companies may lend a director money in two ways:
- Direct transfer from the company’s bank account to the director’s personal account.
- Making payments from the company’s account to make a purchase for the director’s personal benefit.
