There are 2 ways to fund your shiny, brand new company:
- Share capital, &
- Loans of some time
As the company usually lacks a track record, securing a bank or other 3rd party loan is often bordering on the impossible. It is this up to the director to fund the company via his/her personal financial resources and this is done via their director’s loan account – often referred to as the DLA.
Paying in
There is no restriction to what you can pay in or how many times you can top up the company bank account.
For an aggressively growing property company, the company will require funding for the deposit and legals for property #1, then holding costs and builder invoices as the refurbishment works are done and paid for. With property #2 being acquired, the same cycle repeats itself with more cash injections needed for the deposit, legals, holding costs, builders refurbishment – and then the inevitable builder overruns!
For those that are aggressively buying properties and doing large refurbishment works that take a long time (i.e. more expensive refurbs, higher holding costs and longer time frames before you see any income), it can feel like you have created a baby monster that needs to be fed every hour!
Every deposit you make should get recorded in your DLA and this is money the company needs to pay you back – one day!
Taking money out
You are completely free and able to have your company repay you the amounts you have lent it. There are two big caveats here:
- There needs to be sufficient cash to do this.
Where you are buying, fixing and holding, there will typically be some of your capital tied up in the property. The cash available with thus be a lot less than the cash that is owed back to you and will need to wait to be repaid via:- Sale of the property
- Monthly from the rental profit over a number of years
- One day when you refinance and are able to pull more money out due to the increase in property value
- You cannot pull out more money than you put in!
This is very important! Even though you might be the only shareholder and own all the shares and the company is yours – it is a separate legal entity in law.
Where you pull out more money than you lent it, this is considered stealing (from your company). The Queen takes a dim view of this and has some special tax rules in place for offenders. This is one of those cases where you’d be happier (and wealthier) not exploring these rules first-hand!
Legally acceptable ways of taking money out
For buy and hold investments as mentioned above, the ability to steal from your company in the early years is almost impossible.
For those that are flipping, R2R or sourcing, this is a much greater risk. Keeping an accurate track of your DLA contributions and repayments is key. In Xero this is effortless but on our Acorn Accounts Packages you will need to keep a running total.
Our top tip below will help with that if you don’t otherwise have a system.
The only two ways to extract money from a company once your DLA is back at zero is:
- Payroll
- Dividends
Top tip
Every time you top up your DLA, put the word “Loan” as a bank reference.
Every time you repay yourself part of your DLA, put the word “Loan” as a bank reference.
Months (and years) later when looking at the bank statement it makes this analysis much easier and less prone to errors. If you ever in doubt, you can down loan you bank statements and search for the word LOAN which should then summarise all receipts and repayments to you.
Couples and JV's
For married couples, it is worth noting who contributed to the company and whose DLA will thus record the receipt. (However, it all bit academic as ultimately it all belongs to her!)
For friends and JV’s, the distinction of who contributed is crucial as contributions will not be equal. This is why for JV’s we almost always insist on our Essential Accounts Package where Xero is used to record these contributions in and out and thus there is no falling out, confusion or ambiguity as to who is owed what by the company.
Generally interest is not charged on a DLA as the purpose is to shift income and profit from your name to the company, but again with JV’s there are exceptions. As contributions are not equal, you may wish to charge some interest on the loan. Again, with Xero we are able to accurately calculate this using time weighting. (A £100k loan on 1 January will attract interest for 1 whole year whereas a £100k contribution on 31 December will attract interest for 1 day.)
Terms and conditions
As a general rule, DLA’s have three key elements:
- Unsecured,
- Interest free, &
- Repayable on demand
Occasionally it is worth charging a rate of interest on your loan and this is one of the things you accountant should look at as part of the year end routine work done. BUT….just be aware that CT61 will apply where interest is paid to you on your loan.
