Cranfield Business Recovery, Coventry, West Midlands, UK

Securing Director's Loan Accounts

24th April 2009 10:21

Every businessman knows that if he is going to borrow money from a bank, either by way of overdraft or loan, the bank will insist on receiving a debenture to secure the money being advanced and will take a charge over some or all of the company’s assets. Why does the bank do this?

The answer is simple, to improve its chances of recovering the debt from the company in the event of its collapse. As a debenture holder, the bank sits above unsecured creditors and shareholders and therefore when there are not enough funds to go around, the bank stands a much better chance of getting its money back.

If the banks know that by taking out a debenture they are in a more secure position, why is it that directors do not take out a debenture, secured over the company’s assets when they introduce money into their own company by way of a director’s loan account? We believe the reason is they are not advised to do so.

Securing money advance to a company by way of a debenture is a relatively simple process but it has to be done right, otherwise the security is worthless. Very importantly, the debenture needs to be put in place before any money is introduced otherwise the advantage could be lost if the onset of insolvency occurs within two years of the debenture being taken out.

At Cranfield Business Recovery we are able to advise directors, thinking of introducing their own money into their company and how to improve the chances of recovering that money if things do not go according to plan. During these difficult financial times, it is more important than ever to protect funds being introduced and by the use of a debenture, this can be achieved.

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