Director’s Loan to a Company in the UK: What You Need to Know

Need to inject cash into your limited company quickly? A director’s loan to the company can be a flexible way to fund growth, smooth cash flow or bridge a short-term gap.

But because you’re wearing two hats (director and lender), there are important legal, tax and governance steps to get right from day one.

In this guide, we’ll walk through what a director’s loan is, how to structure it properly under UK law, common pitfalls to avoid, and a step-by-step process to put one in place confidently.

What Is A Director’s Loan To A Company?

A director’s loan to a company is where you (as a director or shareholder-director) lend your own money to your limited company. The company becomes the borrower and owes you back the principal (and any agreed interest) on the terms you set.

This is different from putting in equity. With equity, you buy more shares and don’t get repaid automatically; your return is dividends or an eventual exit. With a loan, the company has a contractual duty to repay you per the loan terms, and you can set an interest rate and repayment schedule.

It’s also different from a “limited company loan to director” (money flowing the other way). When a company lends to a director, strict rules apply and there may be a s455 tax charge if the loan isn’t repaid-so don’t confuse the two. Here, we’re focusing on the director lending to the company, which is permitted in principle, but still needs proper governance and documentation as a related party transaction.

If you’re weighing both directions of lending, it’s worth understanding the broader landscape of director loans before you decide.

Can A Director Loan Money To Their Company? The Rules

Yes. UK company law allows a director to lend to their company, and it’s common in early-stage or cash-tight periods. However, there are legal guardrails to follow to ensure the loan is enforceable, fairly documented, and compliant with accounting and tax rules.

1) Board Approval And Conflicts

Because you’re on both sides of the deal, the Companies Act 2006 requires you to manage conflicts of interest properly. In practice:

• Declare your interest in the transaction to the board.
• Have the board (excluding the conflicted director where appropriate) approve the loan and its terms.
• Record the decision with clear board resolutions and keep them with your company records.

If you need a simple template to minute the decision, a Directors’ Resolution is a sensible starting point. Always check your articles of association and any shareholder agreements for quorum and voting requirements.

2) Put It In Writing

Verbal loans and informal transfers create confusion later (especially if other founders are involved). Use a written Loan Agreement that sets out the key commercial and legal terms:

• Principal, interest rate (if any) and whether interest compounds
• Repayment schedule, maturity date and early repayment rights
• Whether the loan is unsecured or secured (and priority versus other debt)
• Events of default and remedies
• Any subordination required by your bank or investors
• Assignment rights (e.g., if you transfer the loan to a family trust or investor)

If the loan is interest-free and repayable on demand, it can still be documented-clarity prevents disputes and helps your accountant treat it correctly in the directors’ loan account.

3) Security And Priority (Optional)

If you want priority in an insolvency scenario, consider taking security. A General Security Agreement (sometimes called a debenture) can secure your loan over the company’s assets. If you take security, you must register the charge at Companies House within 21 days to ensure it’s enforceable against third parties.

Be mindful of existing bank covenants-your lender may restrict additional security or require you to subordinate your director loan to theirs.

4) Execution Formalities

Sign the loan correctly so it’s legally binding. Most loans are simple contracts and can be executed by an authorised signatory. Where you opt to execute as a deed (for example, where there’s no interest-i.e., no consideration-or you want a 12-year limitation period), follow the correct formalities for executing contracts and deeds.

5) Accounting And Disclosure

Related party loans must be recorded in your accounts and may require disclosure in the notes under the Companies Act 2006 and FRS 102. Keep clear records of advances, interest accruals and repayments via the directors’ loan account in your bookkeeping.

6) Tax On Interest

Interest paid by the company is generally a deductible expense for corporation tax if the loan is for business purposes and the rate is commercial. Where the company pays interest to an individual lender (such as you), it may need to deduct basic rate income tax at source (currently 20%) and file a CT61 return with HMRC unless an exemption applies (for example, some short interest). Check with your accountant on your specific facts.

How To Document A Director’s Loan Properly

Getting the paperwork right is more than admin-it protects your position, reassures other stakeholders, and reduces tax and accounting headaches.

Key Clauses To Include

• Purpose: Clarify that funds are for company business.
• Term: Fixed maturity date, rolling or on-demand. On-demand gives flexibility but can worry external lenders.
• Interest: Rate (fixed/variable), accrual and payment dates; consider a commercial rate to avoid transfer pricing issues as the company grows.
• Repayment: Instalments, bullet repayment, ability to prepay without penalty, and whether payments “sweep” surplus cash.
• Default: Triggers (missed payment, insolvency, covenant breaches) and remedies.
• Security: If secured, reference the security document and registration obligations.
• Subordination: State if your loan ranks behind a bank facility or investor notes.
• Transfer: Whether you can assign or novate the loan to another entity you control.
• Set-Off: Whether you can set off loan repayments against amounts you’re owed (e.g., unpaid expenses or remuneration).
• Governing Law: England and Wales, with an appropriate jurisdiction clause.

Approvals And Corporate Records

Before signing, check your constitution, any investor consents needed, and minute the decision with a board approval. Good governance here helps avoid later challenges if other shareholders feel disadvantaged. If your founder group is growing, it’s wise to align financing rules in a Shareholders Agreement (for example, whether future director loans need pre-approval, must be on the same terms for all founders, or must be subordinated to external funds).

Accounting, Tax And Companies House Considerations

Even straightforward loans have compliance angles you’ll want to tick off early.

Directors’ Loan Account (DLA)

Your DLA tracks money you personally pay in and take out. Lending to the company creates a credit balance (the company owes you). Repayments reduce that balance; additional advances increase it. Match actual bank movements with clean records so your year-end accounts are accurate.

Corporation Tax And Interest

• Interest deductibility: Reasonable, wholly-and-exclusively business interest is generally deductible for corporation tax. Excessive or non-commercial rates risk challenge.
• Withholding and CT61: If interest is paid to an individual, the company may need to withhold basic rate income tax and submit a CT61. Your accountant can confirm whether an exemption applies to your circumstances.
• Timing: Accrued but unpaid interest may still be deductible under the loan relationship rules; check your accounting basis.

Related Party Disclosure

Loans to or from directors are related party transactions. Your annual accounts may need to disclose balances, terms and interest under FRS 102 and the Companies Act 2006. Maintain a copy of the signed loan documents in your statutory records to support disclosures.

Security Registration

If you take security, file the charge at Companies House within 21 days. Missing this deadline can render the security void against a liquidator or administrator, leaving you to rank as an unsecured creditor.

Insolvency And Preference Risk

Repayments to directors shortly before insolvency can be scrutinised as “preferences” under the Insolvency Act 1986. If there’s any chance of financial distress, get early advice before making large repayments to connected parties and consider subordination or standstill arrangements where appropriate.

Risks And Practical Pitfalls To Watch

Most issues arise not because director loans are “bad”, but because they’re informal. Keep an eye on these common traps:

• No paper trail: Without a written agreement and board approval, repayments can be disputed and auditors may query the treatment.
• Unequal founder treatment: If multiple directors are lending, set consistent terms to avoid conflict-capture the rules in your Shareholders Agreement.
• Bank covenants: New indebtedness or security may breach your facility. Get lender consent up front.
• Priority illusions: Unsecured loans rank behind secured creditors. If priority matters, consider security and register it promptly.
• Tax leakage on interest: Missing CT61 obligations can lead to penalties. Build a simple calendar for interest and filings.
• Conflicts approvals skipped: Make sure conflicts are declared and decisions are properly minuted using a formal Directors’ Resolution.

Alternatives To A Director’s Loan

A director loan isn’t the only way to fund your company. Depending on your growth plans and investor interest, consider:

• Equity injection: Subscribe for new shares-no scheduled repayments and helps strengthen your balance sheet, though you’ll dilute ownership if multiple founders participate unevenly.
• Advance subscriptions: Time-limited cash for shares using an instrument like an ASA rather than a loan (often preferred ahead of a priced round).
• Bank facilities: Overdrafts or term loans may be cheaper and come with useful limits and covenants-just watch any restrictions they impose on director loans and security.
• Grants and revenue-based finance: Non-dilutive options that may better match cash flow if eligibility criteria fit.

Not sure which route suits you? Decide based on runway needs, investor timetable, covenant flexibility and your appetite for personal exposure. When in doubt, map the options for your board and minute the decision so everyone is aligned.

Step-By-Step: Putting A Director’s Loan In Place

1) Agree The Commercial Terms

Confirm principal, purpose, interest rate, term, repayment schedule, and whether the loan will be unsecured or backed by assets.

2) Check Your Corporate Documents

Review your constitution and any shareholder agreements for restrictions on borrowing, related party transactions or security. If needed, propose updates or seek consents.

3) Prepare Board Papers

Draft a conflicts disclosure and summary of the loan for the board to approve. Use clear minutes or a Directors’ Resolution to record the decision.

4) Draft And Sign The Loan Documents

Put the deal into a written Loan Agreement and, if relevant, a General Security Agreement. Ensure the contracts are properly executed in line with the rules on executing contracts and deeds.

5) Register Any Security

If security is included, register the charge at Companies House within 21 days.

6) Move The Funds And Update Your Books

Transfer the funds to the company’s account and update the directors’ loan account so the advance is recorded correctly.

7) Set Up A Simple Compliance Calendar

Note repayment dates, interest calculation dates and any CT61 filing deadlines for interest withholding, if applicable.

8) Keep The Board In The Loop

Provide brief updates to the board on repayments and any proposed changes. Where terms change, approve them formally via updated board resolutions.

Key Takeaways

• A director’s loan to the company is lawful and flexible-just treat it like any external finance with clear terms, approvals and records.
• Manage conflicts properly: declare your interest, get a clean board approval, and minute decisions to protect all directors.
• Use a written Loan Agreement; consider security via a General Security Agreement if priority matters, and register charges within 21 days.
• Track tax and accounting: interest may be deductible for the company; check any withholding and CT61 obligations when paying interest to an individual.
• Avoid founder disputes by aligning rules for future director loans in a Shareholders Agreement and keeping your board informed.
• If you need help with drafting, approvals or structuring, getting tailored advice early will save time and reduce risk as you grow.

If you’d like help putting a director’s loan in place, drafting the documents, or working through the tax and governance steps, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.