Directors and Debentures – Lending to your own Company

If you’re the Director of a limited company, you have a separate legal identity to your business. This means that loans taken out in your name for the benefit of the business are not the liability of the business. Equally, it also means that loans taken out in the name of the limited company are not the liability of the director – unless the director has given a personal guarantee to the lender.This separate legal identity is an important safety net in the event of an insolvency.

It’s fairly common for Directors to loan money to their own companies for a variety of reasons. But when doing so, it’s worth considering securing those loans with debentures.

Debentures a safer way to lend money to your own business

It can sometimes be easier to raise finances using a personal loan and then lend that to your business rather than arranging a business loan.Directors have also been known to use personal savings to loan money to their business. However, as we’ve discussed recently, there is a hierarchy of creditors and if a Director lends his or her own company money without setting terms, then the Director will, in the event of the company becoming insolvent, be an unsecured creditor. This means that he or she will be near the bottom of the pecking order for distributed assets should the company be put into insolvent liquidation.

Naturally, if the needs of the business are sufficient to warrant taking out a loan from Directors, it’s likely to be a substantial sum, especially for an individual. If the company folds and the Director has personally borrowed the funds to loan to their business, then the risk of losing the monies lent should be mitigated as much as possible.

With this being the case, Directors who wish to lend money to their own company, should consider using debentures, also known as floating charge debentures, to increase their status in the hierarchy of creditors in order to make lending to their own business a little safer.

What are Debentures and how can I use them?

Put simply, a debenture is a written agreement between you as a lender and your company as the borrower which adds formal terms to the loan agreement and secures the loan on assets owned by the company. This raises the status of the Director issuing the loan from an unsecured creditor to a floating charge creditor. While this is only one step up the creditor hierarchy (still beneath preferential creditors and fixed charge secured creditors) it increases the chances that the Director will be repaid should the company be liquidated. It can put your interests ahead of all the unsecured creditors who are now below you in the hierarchy of creditors.

For debentures to be valid, they must be properly executed by the company, registered at Companies House within 21 days of its creation, and it needs to be in place before the money is lent to the company. Once this happens, the loan is secured against company assets and the Director’s personal funds are a little safer as a result.

Loans, Debentures and Asset Finance

If the prospect of lending your own money, or using personal borrowing to raise funds to loan to your business now seems a little less secure, why not contact us for a free consultation.

We can discuss your needs,  advise the pros and cons of floating charge debentures and also advise on other forms of asset finance which may be more appropriate depending on your circumstances.