Director's loan vs business loan

Two different things

A director's loan is money you lend to, or borrow from, your own company — recorded in the director's loan account. A business loan is external funding the company borrows from a lender. One reshuffles money you already have between yourself and the business; the other brings new money in. Confusing the two is common, but they behave very differently, especially at tax time.

The tax traps of a director's loan

If you take money out of the company and the director's loan account goes overdrawn, HMRC treats it seriously. An overdrawn balance not repaid within nine months of the year end can trigger a corporation-tax charge (often called the section 455 charge), and a loan over a threshold can count as a benefit in kind with further tax. Putting your own money in is cleaner, but it is still your capital at risk inside the business. None of this is advice on your situation — confirm the treatment with your accountant.

When a business loan is cleaner

If the company needs working capital and you would otherwise drain personal savings or run an overdrawn loan account, external finance is often the tidier route. It keeps the borrowing on the company, avoids the tax mechanics of a director's loan, and does not put your personal cash inside the business. With Credicorp, a business loan is lent to the company with no personal guarantee, so it sits squarely on the business.

Weighing them up

A director's loan can suit a quick, short, well-documented top-up you will repay within the year — no interest to an outside party, no application. A business loan suits a larger or longer need, when you want to preserve personal cash, or when you would rather not entangle your own money with the company's. Check affordability either way with the affordability calculator, and read how to calculate affordability.