What You Should Know Before Taking Out a Director’s Loan

When you run a growing business, you understand how important it is to keep accurate records and accounts for tax obligations as needed. You fully understand that the business is its own legal entity and not an extension of you, even if you are, essentially, the only shareholder. Yet, in some circumstances, you can access money that is held within the company bank account for other reasons in what is known as a director's loan. What do you need to know about this type of solution, and how should you maintain accurate notes and records?

Division 7A

The ATO details all the information necessary to take out a director's loan under what is known as Division 7A. Various rules apply, including whether the loan is subject to tax or is treated as a dividend in other circumstances.

Source of Capital

Certainly, a director's loan is a potential source of capital that may not be available elsewhere. You may be able to access those funds to give you some equity to buy another business, kick off a new product or service line or for other expenses related to your operational costs. It's not a good idea to borrow funds from your business to cover short-term personal or lifestyle expenses, no matter how pressing the temptation may be. If you do, always ensure that you make the repayments as needed and on time as otherwise that amount could be classified as a dividend and subject to personal taxation.

Keeping Records and Getting Agreement

When you take out a loan, you should keep accurate records. You should create a formal agreement, including the identity of the lender and the borrower and the corresponding signatures. The agreement should also detail any conditions such as the drawing date, the terms of the loan and any rate of interest. If there are other shareholders, they will need to give formal approval in writing, and this should be kept with the other records.

Avoiding Stress

Always ensure that the business has a sufficient surplus when taking into account future cash flow and any "rainy day" allocation. After all, you don't want to put the business under stress by borrowing money for other reasons and without the ability to pay it back on short notice.

Getting Advice

So, before you take any action, talk everything through with your financial adviser. They may be able to come up with other options to fund your needs and will always advise what's best for the business. Contact a local financial management service to learn more.