Director’s loans are an increasingly common tool that business owners use to help fund their small businesses. But they’re beginning to lead to more personal bankruptcies warns a specialist.
A specialist has recently pointed to the number of insolvency cases involving director loans but many small business owners may not be aware of the potential risks in taking out this type of loan during liquidation.
Director loans are still a viable and effective way to increase business funding when used responsibly.
Debit loans are often used to increase cash flow or pay down tax debt during a financial hardship within a business. But many business owners don’t realize that they’re responsible for the debt. With cash flow pressures, a drop in consumer confidence, and non-existent wage increases there’s a perfect storm brewing which is resulting in many small, family businesses being the most likely to suffer from the impact of a bankruptcy for a director loan.
Director loans are not the direct contributor to insolvency but are being seen more and more as contributing factors in financial difficulty.
Director loans are still a viable and effective way to increase business funding when used responsibly. The important point is to be aware of the potential implications when taking out a director’s loan to minimize the potential risks of owning a personal bill should the business fail.
The best strategy, according to experts, is to look at business debt as a short to medium time frame strategy to expand business funding that will be paid back quickly and efficiently rather than as a tax minimization strategy or a way of avoiding other creditors. The division 7A cuts right through the corporate shield and your personal assets may be at risk if you do not go in with your eyes open.
This warning comes as recent data shows a 20% jump in recent business insolvencies in Australia.