It usually starts with good intentions.
A trustee covers a shortfall.
A director pays a supplier personally.
A founder delays reclaiming expenses to ease cashflow.
No formal agreement. No immediate concern. Just support.
Then, later, questions arise:
- “Why does the charity owe you money?”
- “Is there a loan agreement in place?”
- “Has this been approved by the trustees?”
What initially felt helpful can quickly become a governance risk.
For charitable companies, director’s loan accounts (DLAs) are one of the most misunderstood — and highest risk — areas of finance.
Not because they are always inappropriate.
But because they are rarely structured correctly.
What Is a Director’s Loan Account?
A director’s loan account records money either:
- Owed to a trustee/director (they have paid money into the charity), or
- Owed by a trustee/director (they have taken money out)
In commercial businesses, DLAs are common.
In charities, they are far less typical — and subject to much greater scrutiny.
Why DLAs Carry More Risk in Charities
Charities exist to:
- Deliver public benefit
- Avoid private gain
- Maintain public trust
Any financial arrangement between a charity and an individual trustee is viewed through this lens.
A loan — even with good intentions — introduces:
- A personal financial interest
- A potential conflict of interest
- Additional governance responsibilities
This doesn’t automatically make it wrong.
But it does make it sensitive and high-risk if not handled correctly.
Common “Helping Out” Scenarios
We regularly see similar situations develop.
1. Covering Cashflow Gaps
A trustee personally pays for:
Often because:
- Funding is delayed
- Restricted funds can’t be used
These arrangements are usually informal and undocumented.
2. Unclaimed Expenses Building Up
Directors delay reclaiming:
Over time, these balances can grow significantly without being properly tracked or approved.
3. Informal Loans
A founder injects funds “temporarily” to support the charity.
No formal agreement is put in place.
No repayment terms are defined.
The balance remains unresolved.
Why This Becomes a Governance Issue
From a regulatory perspective, the focus is not intention — it is process.
Key questions include:
- Was the arrangement formally approved?
- Were conflicts of interest declared and managed?
- Is the arrangement clearly documented?
- Does it demonstrably benefit the charity?
If these cannot be clearly answered, trustees may be exposed.
Private Benefit: The Key Risk Area
Charities must avoid providing undue private benefit.
A director’s loan can cross this line if:
- Interest is paid unnecessarily
- Repayments are prioritised over charitable activity
- The arrangement favours the individual over the charity
Even interest-free loans can create concerns if they:
- Influence decision-making
- Create reliance on individuals
- Replace proper financial planning
Managing Conflicts of Interest
This is one of the most common areas where charities fall short.
If a trustee:
- Lends money
- Is owed money
- Is repaid money
They must:
- Declare the conflict
- Step away from related decisions
- Ensure everything is properly recorded in meeting minutes
Failure to manage conflicts is a frequent issue identified by the Charity Commission.
When the Director Owes the Charity
This is typically more serious.
A director owing money to the charity can indicate:
- Weak financial controls
- Potential misuse of funds
- Governance concerns
In charities, this is less about tax — and more about trust, accountability, and oversight.
HMRC Considerations
Where DLAs exist, HMRC may also become involved, particularly where:
- Loans are undocumented
- Repayments are irregular
- Benefits in kind arise
This can lead to:
- Payroll complications
- Reporting issues
- Additional compliance risk
Why Trustees Often Don’t See the Risk
Most trustees:
- Are volunteers
- Are not financial specialists
- Act with the best intentions
There is often an assumption:
“If it’s helping the charity, it must be acceptable.”
However, charity law focuses on governance, documentation, and transparency — not just intention.
The “Temporary” Problem
Almost all DLA situations begin as temporary.
Over time, they can become:
- Unmonitored
- Unstructured
- Difficult to resolve
The longer a balance remains:
- The harder it is to justify
- The harder it is to unwind
- The greater the potential risk for trustees
What Regulators Expect
Where a director’s loan exists, there should be:
- A written agreement
- Clear repayment terms
- Formal trustee approval
- Documented conflict management
- Evidence the arrangement benefits the charity
Without these, even well-intentioned arrangements can be challenged.
A Practical Example
A charity experienced a delay in funding.
A trustee stepped in and paid several months of wages personally.
No agreement was put in place.
Later:
- The trustee requested repayment
- Cashflow was tight
- New trustees were uncomfortable with the arrangement
- Funders raised governance concerns
Nothing improper had taken place — but the lack of structure created risk.
When Director Loans May Be Appropriate
In limited circumstances, loans may be acceptable where they are:
- Short-term
- Clearly documented
- Interest-free (or justifiable)
- Approved in advance
- Repaid within an agreed timeframe
However, these situations should be rare and carefully controlled.
Better Alternatives
Strong charities aim to avoid DLAs altogether by:
- Maintaining appropriate reserves
- Forecasting cashflow
- Managing payment terms
- Planning funding gaps in advance
Director loans are not a long-term solution — they are a last resort.
What Good Governance Looks Like
Well-run charities:
- Avoid informal financial arrangements
- Reimburse expenses promptly
- Separate personal support from financial structure
- Protect trustees from unnecessary exposure
Trustees are there to guide the organisation — not financially sustain it personally.
Questions Trustees Should Ask
If a loan exists or is being considered:
- Is this permitted under our governing document?
- Is it clearly in the charity’s best interests?
- Have conflicts been properly managed?
- Is everything documented and time-bound?
- What is the clear repayment plan?
If there is uncertainty, the arrangement should be reconsidered.
Why This Matters
Expectations around charity governance are increasing.
Funders, regulators, and the public expect:
- Strong financial controls
- Clear boundaries
- Accountable decision-making
Director’s loan accounts sit directly within this risk area.
Final Thought
Supporting a charity is admirable.
But when that support isn’t properly structured, it can:
- Create personal risk for trustees
- Lead to governance challenges
- Undermine confidence in the organisation
In charities, clarity isn’t just good practice — it’s protection.
For the charity, for the trustees, and for the long-term success of the mission.