Investing Personal Money into a Company: Advice for directors

Understanding the risks of using personal money to pay company debts

If you use your own money to pay off company debts and improve cash flow, the risks depend on how your business is set up. 

As a sole trader, you’re personally responsible for business debts. However, if you run a limited company, you’re generally not personally liable for company debts unless you give a personal guarantee or behave improperly.


Are You Paying Off Company Debts By Using Personal Funds or Credit Cards?

If you’re a sole trader, a small business owner, or a director of a limited company, you’ll undoubtedly aim to do everything you can to make your business successful. While many businesses may face challenges occasionally, some situations can escalate into more significant financial problems.


What Steps to Take When Your Business Faces Challenges?

If your business encounters a minor setback, temporary solutions such as working capital loans, purchase order finance, invoice factoring, asset refinancing, renegotiating creditor terms, or merchant service advances can help you recover and keep your business on course by injecting essential cash flow.

However, for small startup businesses or those with an uncertain track record or a history of low sales, securing such assistance may not be readily available.

In such situations, many business owners may resort to using personal funds or credit cards to settle company debts and infuse cash into the business. Nonetheless, this can pose a risk, as in the event of business failure, you will bear personal responsibility for these debts.


Is it possible to separate company debts from personal liability?

If you operate as a sole trader, you and your business are considered as one entity, making you automatically responsible for any debts accrued by your business. Similarly, in a standard partnership, both you and your business partner share joint personal liability for any debts the business incurs.

However, if you set up your business as either a Limited Liability Partnership or a Limited Company, there exists a legal distinction between you and your business, including its debts. 

In both these business structures, any financing or obligations are undertaken in the name of the business, holding the business accountable for repayments.

Establishing either a Limited Liability Partnership or a Limited Company involves a slightly more complicated process compared to setting up a sole trader or a standard partnership. 

Often, the assistance of a professional accountant is necessary. However, investing this additional time and financial commitment at the beginning of your business journey may ultimately alleviate significant financial burdens and concerns down the line.


What to do if you fail to raise finance solely against your business?

Unfortunately, in certain instances, securing financing exclusively against your company may not be feasible. Some lenders may insist on a personal guarantee for business loans, whereby you pledge your assets against the loan if the business fails to meet repayment obligations.

However, in some cases, even personal guarantees may not suffice to convince lenders to back your business—particularly if you’re seeking financing to settle company debts. In such scenarios, many business owners resort to using personal funds to clear company debts.

Using personal credit cards to settle business debts might appear beneficial in the short term, but it’s essential to consider how you’ll manage this personal debt in the future. If the worst-case scenario unfolds and the business goes under, it could jeopardise not only the business but also your financial stability.


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How can you loan money from your own business?

Instead of directly using personal funds to address a particular debt, there are situations where formalising the process of lending personal money to your business becomes more viable. Offering a Director’s Loan to your business is an option available if you operate under a Limited Company structure.

The initial step involves verifying whether the company’s Articles of Association permit borrowing money from the director, and if any specific restrictions or covenants apply. Subsequently, drafting a formal loan agreement is essential, outlining the loan date, amount, potential purpose, agreed interest rate, and repayment schedule.

When it comes to charging interest on a Director’s Loan to your company, the decision typically lies with the director’s discretion. However, if interest is levied, it must be documented as a business expense for the company and as personal income for the director, which needs to be declared on their self-assessment tax return.

The company is also responsible for deducting income tax at the basic rate of 20% from the interest paid to the director and for reporting and remitting the income tax quarterly using form CT61.

Generally, we recommend engaging the services of a specialist accountant when extending a formal Director’s Loan to your company to ensure full compliance with regulatory requirements.

Handpicked Accountants offers an excellent service that swiftly and effortlessly connects you with a selection of rigorously vetted accountants in your locality. These professionals provide top-notch expert services at fair and reasonable rates.

If you’re a company director or business owner grappling with servicing your company debts, the temptation to loan money to your business or use personal credit cards to settle business debts can be strong.

However, this often indicates serious trouble for your company. Vanguard Insolvency has been offering specialised business recovery and turnaround advice for nearly 30 years. 

ur licensed insolvency practitioners will thoroughly understand your business and its challenges before suggesting the most viable options.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.