Knowledge Base: A founder’s guide to Directors’ Loans

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:

• Money loaned to the company - for example, when a founder puts in seed capital to cover startup or cash flow costs.

• 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:

• 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.

• Exit priority - Loans are repaid before shareholders on exit. Shareholders come last.

• 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).

• 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.

• 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:

• 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.

• 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.

• 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.

• Disclosure - Director’s Loans must be disclosed during diligence and warranties. Being upfront about them builds trust.

Tax points to know

• Repayment - Loan repayments up to the amount loaned are not taxable.

• Interest - If you charge interest, this may be taxable income personally. Most founders don’t bother.

• SEIS/EIS restrictions -

  • SEIS funds can be used to repay a Director’s Loan.

  • EIS funds cannot - Using EIS money for repayment can cause investors to lose relief. This is a crucial compliance point.

Do you need paperwork?

Strictly, you don’t need a formal loan agreement with yourself. But best practice is to:

• Track all contributions and expenses properly in your accounting software under a “Director’s Loan Account” code.

• Disclose the total balance in funding data rooms.

• Add it to your accounts filed with HMRC.

This helps with transparency and avoids disputes later.

Community tips from founders

• “Investors don’t care much whether it’s equity or a loan - what matters is showing you’ve put money in.”

• “I did mine as a loan but reassured investors it wouldn’t be repaid from the current round, only from future cash flow.”

• “Transparency is key. We disclosed ours and even forecast repayments so investors could see the impact.”

• “Most of us didn’t even formalise paperwork, just tracked it properly in accounting software.”

Quick summary: Pros and cons

Director’s Loan

• ✅ First in line on repayment

• ✅ No CGT on repayment

• ✅ Flexible - can repay later if the company succeeds

• ⚠️ May need to be capitalised if investors push

• ⚠️ Large loans can affect valuation

Equity investment

• ✅ Shows long-term commitment

• ✅ Potential to claim SEIS/EIS relief

• ⚠️ Last in line on exit

• ⚠️ Capital tied up, difficult to get back

• ⚠️ Gains subject to CGT

Best practice for founders

• Use a Director’s Loan for initial seed capital unless investors force conversion.

• Keep clean records in accounting software.

• Be transparent in disclosure and data rooms.

• Don’t expect repayment from early rounds - signal you’ll wait until Series A or exit.

• Get tax advice if mixing loans with SEIS/EIS funding.