What it is

Your loan account records money moving between you and the company outside salary, dividends and expenses. If you have taken more out than you put in, it is overdrawn — and that balance is money you owe the company.

It usually builds up quietly. Drawings taken through the year against dividends that the profits turn out not to support. Nobody sets out to create one.

What it costs while the company trades

If a loan to a director is still outstanding nine months and a day after the year end, the company pays a tax charge on it. That money is refundable once the loan is repaid, but it goes out in the meantime, and for a company already short of cash it is a real problem.

Writing the loan off is not a solution either — the write-off is generally taxable on you personally as income. There may also be a benefit in kind on top.

What happens if the company closes

This is the part that catches people.

An overdrawn loan account is an asset of the company, in the same way a debtor is. In a liquidation the liquidator has to collect the company’s assets, and that includes asking you to repay the balance in full. It is not discretionary and it is not negotiable in the way a trade debt might be.

Directors are regularly surprised by this. It is one of the main reasons a liquidation costs a director more than they expected.

Dividends that were not covered

A dividend can only be paid out of real distributable profits. Where dividends were declared and the profits were not there, the amount comes back — usually treated as a further loan, which makes the overdrawn balance bigger. Companies that looked profitable on paper tend to discover this at the worst moment.

How we handle it

An overdrawn balance is part of what we assess and it affects the terms of any transaction. It has to be on the table from the start — it will be found either way, and finding it late ends deals.

Where the balance is significant and the company is insolvent, this is one of the situations where independent advice is worth having before you decide anything. We will say so rather than press on.