The first time you put personal money into the company, the reason may be obvious. A customer is paying late and wages are due on Friday. The fourth time, the explanation may be harder to pin down. Before transferring more, work out what the money buys, where repayment would come from and what the loss would mean at home.
A director’s loan, a personal credit card, a guarantee and borrowing against your home expose you in different ways. Put them on separate lines when you assess the risk. If the company may be unable to pay its debts, take advice from a licensed insolvency practitioner before committing further money. Use an accountant for the accounting and tax treatment, and a solicitor for guarantees and security.
Lending your own money to the company
If you transfer money to the company as a loan, the company owes you under the agreed terms. Record what you put in, when and on what terms. Check that the payment is reflected in your director’s loan account. The Insolvency Service’s guidance on loans and funding explains the record you need to keep.
Tell your accountant if you intend to charge interest or if it is unclear whether an earlier payment was a loan, capital or reimbursement of an expense. The distinction matters for the accounts and can affect the tax treatment. HMRC’s guidance on money lent to your company sets out the treatment of interest. Avoid leaving the nature of the payment to be worked out from a bank reference later.
Ask what cash will be available to repay you after the company meets its other commitments. If the forecast can only show repayment by assuming that tax or suppliers will wait, take that as a question to investigate. If the business fails, you may recover little or none of the money. If the company is already struggling, get advice before repaying yourself or taking security for an existing loan.
Paying with a personal credit card
Where the card is in your name, look at the agreement to establish what you owe the card provider. A promise from the company to reimburse you does not transfer your personal obligation to the company. Keep receipts and make sure legitimate business expenditure is recorded correctly.
There is a practical difference between paying an expense and financing a recurring deficit. Imagine paying a parts supplier on a personal card so an order can ship. Write down the amount, the expected customer payment date and the date you have to pay the card provider. Then ask what happens if the customer disputes the invoice. If your only response is to carry the card balance and buy more parts next month, the transaction is putting a business risk onto the household budget.
Track all personal cards used for the company together. Look at balances, due dates and the payments the household can afford from its own income. If a card is already carrying ordinary household costs, account for those too. A small new business purchase can look manageable until you see the total exposure.
Signing a personal guarantee
A guarantee can make you personally responsible for a company obligation on the terms you sign. It might relate to a loan, overdraft or other finance agreement. The Insolvency Service’s guide to personal and company debts explains how a guarantee can create personal liability.
Read the actual document with a solicitor before signing or extending it. Ask which debts are covered, whether the amount is capped, what can trigger a claim and how a release would be documented. If there are several guarantors, ask whether the creditor could pursue you for more than you have assumed. Give the solicitor the facility terms as well as the guarantee. A conversation with the lender’s relationship manager is useful context, but it cannot establish the wording you have agreed.
Make a list of any guarantees you already have. Include the creditor, the facility, the current amount outstanding and where the signed document is kept. Some directors discover their total exposure only when a facility is being renewed. It is easier to make a considered decision when all commitments are visible beforehand.
Borrowing against your home
Remortgaging or taking secured borrowing can turn a company shortfall into a long-term household commitment. The company may stop trading while the borrowing and its monthly payments continue. If the borrowing is secured on your home, missed payments can put the property at risk. Take independent advice about the borrowing and ask a solicitor to explain the security before agreeing anything.
Build a household budget that assumes the company will repay nothing and that your income from it could fall. Include the repayments and the expenses you cannot easily reduce. If another person owns or lives in the property, the decision has consequences for them too. Discuss those consequences before approaching the decision as a way of covering Friday’s payroll.
Decide what would make you stop
Start with a current cash forecast and a specific use for the money. For example, you may be able to show that a defined sum would complete a profitable order with a credible collection date. Test the same proposal with a delay and a lower receipt. Compare that with a cash injection that only pays overdue bills while a loss-making operation carries on at the same pace. The figures should show the difference.
Write down the maximum you can afford to lose without relying on repayment, the decision date and the conditions under which you would decline to lend more. If the order slips, a facility is withdrawn or arrears increase, revisit the decision using the new information. Review the guide to cash flow forecasting for SMEs if you need to rebuild the company’s forecast before deciding.
Persistent personal top-ups are one of several signs that the business may need restructuring. Review the cash flow and balance sheet tests if the company’s ability to meet its debts is uncertain. The guide to director duties under financial pressure explains why payments and new commitments need extra care when creditor interests are at stake.
Before you move more money, put the personal exposure and the company forecast in front of the right adviser. A useful decision can be to wait while a specific fact is checked. If the business needs the money immediately, say so at the start of the call so that the adviser understands the timetable.
The director’s guide to the financial pressure series takes you through the other warning signs and the decisions that tend to follow.
If other directors are contributing, document each contribution separately. Discuss what happens if one person cannot put in more and whether the company can still carry out its plan. It is easier to have that conversation while everyone can see the same figures and before anyone has made a personal commitment.
If you would like help organising the figures and deciding what needs attention first, G&G offers a free 30-minute consultation. For legal or insolvency advice, speak to a solicitor or a licensed insolvency practitioner.
