If your company needs cash, you can lend it your own money through a director's loan, or the company can borrow from an outside lender. Lending personally is quick and flexible, but it concentrates your savings in one business and has its own tax paperwork. A business loan keeps more of your personal money separate, though it costs interest and fees and often comes with a personal guarantee. The right choice depends on how much is needed, for how long, and how much of your own wealth you are prepared to put at risk.
Many directors of small limited companies reach for their own savings first, because it feels simpler than applying for finance. Sometimes it is. But once the sum runs into tens or hundreds of thousands of pounds, it is worth comparing the two routes properly. Lenders that focus on established companies set out what they offer and what they ask for; EAL Holdings, for instance, describes SME business finance for working capital, growth and refinancing on its website. Comparing a published product like that with the cost and risk of using your own money gives you a clearer basis for the decision.
This guide explains how each route works, how HMRC treats interest on money you lend to your company, and what to think about before you choose. It is general information, not financial, tax or legal advice.
What is a director's loan to the company?
When you put money into your company that is not a payment for shares, it is usually recorded as a loan from you to the company. GOV.UK says you must keep a record of money you borrow from or pay into the company, usually called a director's loan account, and that any amount owed either way at the year end goes on the balance sheet in the company's annual accounts.
A loan from you means the company owes you that money. It is different from buying more shares, which increases your ownership rather than creating a debt. Your accountant can advise which suits you, and both should be properly documented.
How is interest on a director's loan taxed?
You do not have to charge your company interest, but you can. According to GOV.UK's guidance on lending your company money:
- the company does not pay Corporation Tax on money you lend it;
- interest you charge is a business expense for the company and personal income for you, which you declare on your Self Assessment tax return;
- the company pays you the interest after deducting basic-rate Income Tax;
- the company must report and pay that Income Tax to HMRC every quarter using form CT61.
So charging interest can be a reasonable way to be rewarded for the risk you are taking, but it adds admin and personal tax. If the director's loan account goes the other way and you end up owing the company money, different rules and potential tax charges apply, so keep an eye on the balance.
How does a business loan compare?
With a business loan, an outside lender provides the money and the company repays it over an agreed term, with interest and usually fees. For smaller companies, lenders commonly ask directors for a personal guarantee, so your own assets can still be at risk. The difference is that you are guaranteeing a debt rather than handing over your savings in advance, and you keep your own cash available for other needs.
Most lending to limited companies falls outside consumer credit regulation, so the written terms matter more than ever. Check any lender or broker on the FCA Register and read the agreement in full before you sign.
Director's loan vs business loan at a glance
| Question | Director's loan (your own money) | Business loan (outside lender) |
|---|---|---|
| How fast is it? | As fast as you can move the money | Depends on the lender's process and your documents |
| What does it cost the company? | Whatever interest you choose to charge, which is deductible for the company | Interest and fees set by the lender |
| Tax for you personally | Interest is taxable income; the company withholds basic-rate tax and files CT61 | None directly, unless you are called on under a guarantee |
| Your personal risk | Your savings are already in the business | Often a personal guarantee, which may be called if the company cannot pay |
| Flexibility | Terms are between you and the company; record them properly | Fixed by the agreement; early repayment terms vary |
| Effect on future borrowing | Lenders may look at how director loans are documented | Adds an existing debt other lenders will take into account |
What happens to your loan if the company fails?
This is the risk directors most often overlook. If the company becomes insolvent, money you have lent it is generally treated as a debt owed to you, and unless you took security, you may rank behind lenders who did. In other words, a large personal loan to a struggling company can be the first money lost.
You can check what charges other lenders already hold over a company's assets using the free Companies House service. If you lend a significant sum, take legal advice on whether and how your loan should be documented or secured.
When does each route tend to make sense?
Your own money may suit
- small or short-term gaps, such as covering a few weeks until a customer pays;
- a very early-stage company that does not yet meet lenders' criteria;
- situations where you can comfortably afford to lose the sum if things go wrong.
A business loan may suit
- larger, planned spending, such as expansion, new premises or refinancing existing debt;
- an established company with accounts and bank statements that show it can repay;
- directors who want to keep personal savings available for their own security or other plans.
Some directors combine the two: a modest loan of their own alongside external finance. If you do, make sure any lender knows about your loan, as it may ask how and when it will be repaid.
Preparing if you choose a business loan
- Bring the company's filings at Companies House and HMRC up to date.
- Gather recent accounts and 6 to 12 months of business bank statements.
- Write a short explanation of what the money is for and how it will be repaid.
- Make sure your director's loan account is accurate, because lenders will see it in the accounts.
- Ask each lender what kind of credit search it runs at enquiry and at application.
- Understand the personal guarantee: is it capped, and when does it end?
A lender example
EAL Holdings, registered in England and Wales with its registered office in Harrow, Middlesex, states on its website that its SME business finance runs from £100k to £500k over 12 to 60 months for working capital, growth and refinancing, with a personal guarantee. It says the SME product is aimed at businesses trading for three years or more, that it typically asks for 6 to 12 months of business bank statements, recent accounts and director ID, and that enquiries use a soft search, with a hard search only if the applicant chooses to proceed. It lends to UK-registered companies and does not lend to consumers. As with any lender, its criteria and terms apply and an enquiry is not a guarantee of finance.
Frequently asked questions
Do I have to charge my company interest on a director's loan?
No. You can lend interest-free. If you do charge interest, the company deducts basic-rate tax, reports it on form CT61 and you declare the interest on your Self Assessment return.
Can the company repay my loan at any time?
Generally yes, if the company can afford it and you have agreed terms. If an outside lender is involved, check whether its agreement restricts repaying director loans first.
Is a personal guarantee the same as lending my own money?
No. With a guarantee you only pay if the company defaults and the lender calls on it. With a director's loan your money is already in the business.
Should I put money in as a loan or as shares?
It depends on your tax position and plans for the company. A loan can be repaid; shares increase your ownership. Ask your accountant before you transfer the money.
Sources
- GOV.UK: Directors' loans
- GOV.UK: If you lend your company money
- GOV.UK: Get information about a company (Companies House)
- FCA Financial Services Register
- GOV.UK: Finance and support for your business
General information only, not financial, tax or legal advice. Business finance is credit and must be repaid, and personal guarantees put your own assets at risk. Take independent advice before lending to or borrowing for your company.