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Published 09 April 2024
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5 minutes

How do Limited Company Business Loans Work?

Limited company loans offer a way for businesses to potentially get the funds they need to take their business to the next level. Loans between directors and their business are also possible, but keep a record and be aware of the tax implications.

If you’re looking for finance to help your business, a limited company loan could be an option. Whether you want to fund a new project, expand your products or services or cover a temporary shortfall, there are a few routes you might take to help make that happen.

From commercial funding to loans between directors and their business, here’s what to consider when you’re borrowing as a limited company.

What is a limited company business loan?

Limited company loans are a type of borrowing for businesses that are registered as limited companies with Companies House. A limited company is legally separate from its directors and must be incorporated with Companies House.

There are a few types of limited company business loans, with available terms and amounts, and lending criteria, varying between providers. They are typically unsecured loans, where you don’t have to offer any collateral, such as property or inventory.

Without assets as security, some lenders may ask for a personal guarantee from the director. This is where a director agrees to be liable for business debts if the company becomes insolvent. Make sure you’re aware of what that means for you before going ahead.

» MORE: Directors’ liabilities when a business goes bust

The common thread across loan types is that your business pays the money it borrowed plus interest back over a set term, at an agreed interest rate.

Who can get a limited company loan?

Whether it’s a traditional lender or an alternative finance provider, whichever loan you apply for, you will need to be a limited company and will usually need a minimum turnover and time trading to be eligible. You will also need to be at least 18 and run a UK-based, limited company.

Your personal and business credit score will be taken into account. The lender may also ask to see a clear business plan and record of turnover and cash flow, along with recent accounts to get a picture of the overall financial performance of your business. The provider will want to be confident that your business is in a position to pay the loan back.

If you’re a very new business with little or no trading history, you may consider a start up loan or other ways to get a cash injection, such as angel investors, crowdfunding or peer-to-peer business financing.

Can a private limited company get a loan?

Yes. Limited company business loans are available to private businesses, where ownership of the company is split into shares owned by shareholders. This is a typical structure for start ups and the most common type of incorporation.

You may also want to check if you could be eligible for small business grants. Unlike loans, grants don’t usually need to be paid back, though some have terms or targets attached.

Can I borrow or loan money as a limited company?

If you are a director of a limited company, there are a few routes, including directors’ loans, that you could consider, which we explain below.

What is a limited company directors’ loan?

With a directors’ loan, a director either borrows money from their business or loans money to it.

If you are borrowing money from your limited company, it is considered a loan if it is not:

  • salary
  • expenses
  • dividends
  • money you loaned to the business in the past

If you take a director’s loan, you have an overdrawn director’s loan account. You should keep a director’s loan account (DLA) of the loan and record yourself as a debtor. This is simply a record of money that you either borrow from your company or pay into it.

What about tax?

You should also make a record of the loan in your balance sheet and consider that it may be taxable. Whether you or the company need to pay tax on the loan depends if you owe the company money or if the account is in credit, where the company owes you money.

You won’t be liable for tax if you pay the loan back in full within nine months and a day of your limited company’s year-end. If you don’t pay it back by then, you’ll pay a penalty of 33.75% (Section 455) tax on the original loan amount for loans made after April 2022. You can reclaim this tax once you’ve paid off the overdrawn account in full.

If the sum is paid to someone closely connected to you, such as family, friends or business partners, you will also need to make a note of the transactions.

The company can set the interest rate it will charge on the loan. If the rate is discounted from the official rate, set at 2.25% from 6 April 2023, it could be treated as a benefit in kind and affect tax and National Insurance contributions. This is also the case if the loan is over £10,000, which would also need shareholder approval.

It’s worth considering that if the company becomes insolvent and any of the loan is still outstanding, the director would be considered a debtor and would be expected to pay it off.

Can I loan money to my limited company?

Yes, if you are a director it’s possible to lend money to your limited company, where you become a creditor. The company won’t pay corporation tax on the money you lend it.

If you charge interest on the money, you would treat it as a business expense and personal income when you fill in your self-assessment tax return. There are rules that the company must follow to pay back the loan and report and pay income tax due. When you loan money to your company, you will also need to keep track of it in your director’s loan account.

As you can tell, the rules around directors’ loans can be complicated, if you are unsure it’s always a good idea to ask an accountant to help you work out the tax implications.

» MORE: How to get a business loan 

Image source: Getty Images

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