Director's Loan Agreement
Key Takeaways
- A Director's loan agreement is a contract which sets out the agreed terms, whether the Director is lending money to the company, or borrowing from them.
- The amount you can lend or borrow is unlimited.
- You should always use a properly drafted loan agreement for a directors' loan.
- We can help with legally drafted loan agreements and offer a simple service or a bespoke agreement for more complicated requirements.
- You should consult a financial advisor before borrowing or lending large sums of money.
What is a director's loan agreement?
A director's loan agreement is a loan agreement drafted specifically for money which is lent to the director (or their close family) from the company, or lent to the company from the director. A Director's loan doesn't include salary, dividends, expense repayments, or repayments of a previous loan in the opposite direction.
Do I need a loan agreement for a directors loan?
You should always have a professionally drafted loan agreement when lending or borrowing money, to protect your intentions in case you have to enforce them later. This is particularly important for a Director's loan because if the director does not pay the loan back in time, the company will face major tax penalties.
Perhaps obviously, the lender is protected by a loan agreement as they will be able to enforce the terms of the contract in a court of law if there is a problem in getting the money back. However, the borrower is protected too. Without a loan agreement which sets out your intentions and terms of the loan, the lender could try and demand repayment in full at any time, which may suddenly put the borrower in a very bad financial situation, having often spent the funds and having no way to repay the loan early.
How much Director's loan can I take?
The Director's loan you can take is legally unlimited. You should never borrow more than you or the company can afford, or you will likely face serious cash flow issues. We can introduce you to a financial advisor who can recommend a reasonable limit to how much Director's loan you can take in the context of your company's current financial situation.
How do you document a Director's loan to a company?
You should document a Director's loan to a company within a professionally drafted loan agreement. Whilst it is possible to download a simple loan agreement online, these are often not enforceable if completed without the help of a legal professional. A solicitor will gather all of the necessary information to carefully construct a legally enforceable agreement and ensure that their client understands the terms they are agreeing to. The other party should get independent legal advice of their own (this must be from a separate law firm).
What information is required to properly document a Director's loan?
- Company name, registered number and address;
- Full name, home address and contact details for both parties;
(If the company has two or more directors, we will require minutes confirming board approval for the loan, signed by at least two directors. We will issue a template document for these minutes with the first draft of your loan agreement). - Loan amount and type (interest/capital etc);
- Purpose of the loan;
- Loan term (duration of the loan and/or repayment trigger);
- Interest rate (you may want to set a higher rate for late repayments and on long term loans it is fairly common to agree for the interest rate to revert to RPI after a shorter set term);
- Repayment frequency, instalments and date (i.e. 1st of each month);
- Security (if the loan is being secured against an asset, such as a property)
(if the security is subject to a pre-existing charge, your solicitor will be able to advise. Securing a loan against a property with a first charge, without the primary lender's consent, may mean the debt cannot be recovered against the asset, and that the loan is effectively unsecured); - Any agreed late repayment charges
If you are looking for accounting advice on documenting the Director's loan payments in and out, contact us to be introduced to a qualified accountant, who Parachute Law recommend.
Frequently Asked Questions
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