1.A business sometime may need urgent funds for various reasons. This may range from helping it to navigate during turbulent periods such as machinery breakdown to having to pay deposits for inventories orders. There are various options that a business can consider to raise the funds they need. They can either source it from bank loans, issue shares to shareholders or apply for government grants. One other common source of funds would be getting a loan from the company’s directors.
2. If a director lends money to the company, it is required to have a written evidence that it accepts the loan subject to agreed terms and conditions. This can be done via a directors’ resolutions, whereby it will list down the loan amount, interest rate and repayment periods. Once the directors’ resolutions is signed, it is an evidence that all directors agreed to accept the director’s loan on the stated terms and conditions.
3. It is important to note that the directors’ loan is usually rank the last in the repayment ranking. What this means is that the company will repay the directors’ loan only after settling the amounts owed to other parties such as employees, suppliers, banks and government agencies.
4. From a tax perspective, neither the company nor directors has tax implications if no interest is imposed on the loan. If there is interest payable to the director for the loan to the company, the director need to include this in his personal income tax returns as interest income received. As for the company, interest expense is a tax deductible expense that can reduce the amount of taxable income.
5. It is often the case that the director agrees to waive the repayment of loan from the company. This waiver will result in the company recording this as non-trade income in the profit and loss account. As this is a non-trade income, it will not be subject to tax to the company.
6. In addition, the loan from director can also be converted to share capital of the company. The conversion of loan to share capital will result in the increase in share capital of the company. If the director is also a current shareholder, his percentage shareholding of the company will be increased too.
7. A directors’ loan can be an effective way to infuse cash into a company. However, exercising caution and seeking professional advice before taking or making a loan is essential. This is particularly important when the company is experiencing financial difficulties. By understanding directors’ loans’ legal and tax implications, companies and directors can make informed decisions about their finances and ensure compliance with relevant regulations.
8. If you need help to know whether and how much dividends your company can pay, please come and talk to us. Our team of chartered and certified accountants at PL Biz Consulting Pte Ltd are on hand to support your business and answer your queries – reach out to us today.
