Ltd Company borrowing - personal loan or business loan?
Discussion
Hi folks
My wife needs to get some operating capital into her Limited Company and needs to borrow the money to do it.
As I see it, there are two choices for a loan. One is a business loan, which her business bank have been happy to offer. However, she must personally guarantee it and it's variable rate at base + 3.5% for a 3 year term, with an overpayment penalty of 1% per remaining year (ie. 3% in the first year) which seems a little steep.
The other alternative is a fixed-rate unsecured personal loan in her name which she then lends to the company. I believe this is acceptable and allowable?
As I see it, if she is personally guaranteeing the business loan then there is no difference in liability between the business loan and the personal loan, and on the latter the rate and terms seem to be better. But is it allowable to do this?
Anyone with experience in this area able to comment?
My wife needs to get some operating capital into her Limited Company and needs to borrow the money to do it.
As I see it, there are two choices for a loan. One is a business loan, which her business bank have been happy to offer. However, she must personally guarantee it and it's variable rate at base + 3.5% for a 3 year term, with an overpayment penalty of 1% per remaining year (ie. 3% in the first year) which seems a little steep.
The other alternative is a fixed-rate unsecured personal loan in her name which she then lends to the company. I believe this is acceptable and allowable?
As I see it, if she is personally guaranteeing the business loan then there is no difference in liability between the business loan and the personal loan, and on the latter the rate and terms seem to be better. But is it allowable to do this?
Anyone with experience in this area able to comment?
You are quite correct.
If she is personally guaranteeing the loan, then it nullifies the point of getting a loan for a Limited company.
Get the best and most flexible rate you can, and that will no doubt be a personal loan.
I have done both, and earlier in my business career got 'stung' by one of these guarantees. It really is like signing your rights away. The guarantee usually not only allows them the loan amount but a lot more in the way of costs and defaults should things go wrong. Further to that the amount that is the 'guaranteed' amount remains the same regardless of how much is actually owed on the loan.
Avoid like the plague.
If she is personally guaranteeing the loan, then it nullifies the point of getting a loan for a Limited company.
Get the best and most flexible rate you can, and that will no doubt be a personal loan.
I have done both, and earlier in my business career got 'stung' by one of these guarantees. It really is like signing your rights away. The guarantee usually not only allows them the loan amount but a lot more in the way of costs and defaults should things go wrong. Further to that the amount that is the 'guaranteed' amount remains the same regardless of how much is actually owed on the loan.
Avoid like the plague.
JonRB said:
The other alternative is a fixed-rate unsecured personal loan in her name which she then lends to the company. I believe this is acceptable and allowable?
Perfectly usual - it justs gets entered into the company's books on the director's loan account for your wife as being capital she introduced into the company, which remains repayable to her.Lurking Lawyer said:
Perfectly usual - it justs gets entered into the company's books on the director's loan account for your wife as being capital she introduced into the company, which remains repayable to her.
What about repayments? Do the repayments come out of her taxed income (ie. personal money) or can they come out of company pre-tax profit (ie. the company is servicing the loan despite it being a personal loan in her name) and are there any tax implications to this (ie. is it counted as a taxed dividend or something?)Plotloss said:
If its a working capital injection would an overdraft be an option?
I doubt the bank would provide an overdraft to the level she needs. I can't really go into specifics but there is a minimum sum she needs and it is more appropriate to a loan than an overdraft.If the loan is in her name, then the money will, in theory go from lender - to her - to the company.
The company will therefore be indebted to her.
If the company repays her or the bank directly, it should be treated as repaying the loan that SHE has made to the company. However, the company will NOT be able to obtain any tax relief on the interest charged by the bank on this loan as it is not the company's interest to pay, it is her's. If the company is repaying the full repayments directly to the bank on your wife's behalf, the interest element of the loan repayment would be treated as a taxable Benefit in Kind.
The only way the company can claim tax relief on the interest paid would be if the loan was in the company's name.
Your wife COULD obtain personal Income Tax relief on the interest charges IF the loan is used to buy share capital in the company, but not if it is merely to support working capital.
The company will therefore be indebted to her.
If the company repays her or the bank directly, it should be treated as repaying the loan that SHE has made to the company. However, the company will NOT be able to obtain any tax relief on the interest charged by the bank on this loan as it is not the company's interest to pay, it is her's. If the company is repaying the full repayments directly to the bank on your wife's behalf, the interest element of the loan repayment would be treated as a taxable Benefit in Kind.
The only way the company can claim tax relief on the interest paid would be if the loan was in the company's name.
Your wife COULD obtain personal Income Tax relief on the interest charges IF the loan is used to buy share capital in the company, but not if it is merely to support working capital.
Edited by Eric Mc on Thursday 6th March 15:59
Eric Mc said:
If the loan is in her name, then the money will, in theory go from lender - to her - to the company.
The company will therefore be indebted to her.
If the company repays her or the bank directly, it should be treated as repaying the loan that SHE has made to the company. However, the company will NOT be able to obtain any tax relief on the interest charged by the bank on this loan as it is not the company's interest to pay, it is her's. If the company is repaying the full repayments directly to the bank on your wife's behalf, the interest element of the loan repayment would be treated as a taxable Benefit in Kind.
The only way the company can claim tax relief on the interest paid would be if the loan was in the company's name.
Your wife COULD obtain personal Income Tax relief on the interest charges IF the loan is used to buy share capital in the company, but not if it is merely to support working capital.
Thanks Eric - a comprehensive and helpful reply as ever. Much appreciated.The company will therefore be indebted to her.
If the company repays her or the bank directly, it should be treated as repaying the loan that SHE has made to the company. However, the company will NOT be able to obtain any tax relief on the interest charged by the bank on this loan as it is not the company's interest to pay, it is her's. If the company is repaying the full repayments directly to the bank on your wife's behalf, the interest element of the loan repayment would be treated as a taxable Benefit in Kind.
The only way the company can claim tax relief on the interest paid would be if the loan was in the company's name.
Your wife COULD obtain personal Income Tax relief on the interest charges IF the loan is used to buy share capital in the company, but not if it is merely to support working capital.
This is pretty much as I feared and expected, to be honest. So it comes down to whether the more favourable terms of a personal loan offset the higher cost of the business loan or not, once the fact that the business loan attracts tax benefits is taken into account.
Things are never simple, are they?
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