What is a Director’s Loan?
A Director’s Loan Account (DLA) is simply a record of money flowing between a company and its directors that isn’t salary or dividends.
It can include:
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Money loaned to the company - for example, when a founder puts in seed capital to cover startup or cash flow costs.
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Money borrowed from the company - such as drawings taken by the director that aren’t yet processed via payroll or dividends.
In a fundraising context, when founders talk about a “Director’s Loan,” they usually mean the personal money they’ve put in to get the company off the ground.
Why consider a Director’s Loan instead of equity?
When you’re deciding whether to put your early investment in as a loan or as equity, here are some key differences:
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Repayability - A loan is repayable at any time once the business has cash available (subject to investor agreements). Equity isn’t. Returning capital from equity requires buybacks or other complex mechanisms.
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Exit priority - Loans are repaid before shareholders on exit. Shareholders come last.
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Tax efficiency - Loan repayment is not a taxable event. You get your cash back without CGT. If you invest as equity, repayment on exit may be subject to Capital Gains Tax (CGT).
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Skin in the game - Some founders think equity shows more commitment. But most investors recognise that putting money in as a loan is still skin in the game - you’re taking on real financial risk either way.
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Flexibility - With a loan, you retain the option of repayment when conditions allow. Equity ties up your money indefinitely.
Investor considerations
While a Director’s Loan can be founder-friendly, investors may have views:
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Repayment restrictions - Many VCs and angel syndicates include terms that prevent repayment of Director’s Loans from their investment. This means repayment is usually deferred until later rounds or exit.
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Capitalisation risk - Some investors may insist that Director’s Loans are capitalised - converted into equity at the same valuation as the funding round. This removes the preferential treatment and puts you on the same terms as them.
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Valuation impact - If your loan is large relative to the round, some investors may argue for a lower valuation, seeing it as a liability on the balance sheet.
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Disclosure - Director’s Loans must be disclosed during diligence and warranties. Being upfront about them builds trust.
Tax points to know
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Repayment - Loan repayments up to the amount loaned are not taxable.
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Interest - If you charge interest, this may be taxable income personally. Most founders don’t bother.
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SEIS/EIS restrictions -
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SEIS funds can be used to repay a Director’s Loan.
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EIS funds cannot - Using EIS money for repayment can cause investors to lose relief. This is a crucial compliance point.
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Do you need paperwork?
Strictly, you don’t need a formal loan agreement with yourself. But best practice is to:
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Track all contributions and expenses properly in your accounting software under a “Director’s Loan Account” code.
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Disclose the total balance in funding data rooms.
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Add it to your accounts filed with HMRC.
This helps with transparency and avoids disputes later.
Community tips from founders
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“Investors don’t care much whether it’s equity or a loan - what matters is showing you’ve put money in.”
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“I did mine as a loan but reassured investors it wouldn’t be repaid from the current round, only from future cash flow.”
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“Transparency is key. We disclosed ours and even forecast repayments so investors could see the impact.”
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“Most of us didn’t even formalise paperwork, just tracked it properly in accounting software.”
Quick summary: Pros and cons
Director’s Loan
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✅ First in line on repayment
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✅ No CGT on repayment
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✅ Flexible - can repay later if the company succeeds
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⚠️ May need to be capitalised if investors push
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⚠️ Large loans can affect valuation
Equity investment
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✅ Shows long-term commitment
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✅ Potential to claim SEIS/EIS relief
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⚠️ Last in line on exit
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⚠️ Capital tied up, difficult to get back
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⚠️ Gains subject to CGT
Best practice for founders
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Use a Director’s Loan for initial seed capital unless investors force conversion.
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Keep clean records in accounting software.
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Be transparent in disclosure and data rooms.
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Don’t expect repayment from early rounds - signal you’ll wait until Series A or exit.
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Get tax advice if mixing loans with SEIS/EIS funding.
