It usually starts with good intentions.
A trustee covers a shortfall.
A director pays a supplier personally.
A founder delays reclaiming expenses to “help cashflow”.
No paperwork. No drama. Just support.
And then — months later — someone asks a question.
“Why does the charity owe you money?”
“Is that loan documented?”
“Has interest been charged?”
Suddenly, what felt like generosity starts to look like risk.
For charitable companies, director’s loan accounts are one of the most misunderstood — and most dangerous — areas of finance.
Not because they’re always wrong.
But because they’re rarely handled properly.
What Is a Director’s Loan Account (DLA)?
A director’s loan account records money:
- Owed to a director/trustee (they’ve paid in)
- Or owed by a director/trustee (they’ve taken out)
In commercial companies, DLAs are common.
In charities, they’re exceptional — and heavily scrutinised.
That distinction matters more than most people realise.
Why DLAs Are Riskier in Charities Than in Businesses
Charitable companies exist to:
- Deliver public benefit
- Avoid private benefit
- Maintain public trust
Any financial relationship between a charity and an individual trustee or director is examined through that lens.
A loan — even a well-intended one — creates:
- A private financial interest
- A conflict of interest
- A governance obligation
That doesn’t make it illegal.
It makes it sensitive.
The Most Common “Helping Out” Scenarios
We see the same patterns repeatedly.
1. Covering Cashflow Gaps
A trustee pays:
- Wages
- Rent
- A key supplier
Often because:
- Grant money is delayed
- Restricted funds can’t be used
No agreement. No approval. Just urgency.
2. Unreclaimed Expenses
Directors delay reclaiming:
- Mileage
- Equipment
- Travel costs
Over time, these accumulate into large balances that no one is tracking.
3. Informal Loans
A founder injects money “temporarily” with the intention of taking it back later.
Months pass.
No repayment plan exists.
Why This Becomes a Governance Problem
From a regulatory perspective, the questions aren’t emotional — they’re structural.
Regulators ask:
- Was this loan authorised?
- Were conflicts declared?
- Was it in the charity’s best interest?
- Were terms fair and documented?
Without clear answers, trustees — even well-meaning ones — become exposed.
Private Benefit: The Red Line
Charity law is clear.
Charities must not provide undue private benefit.
A director’s loan can cross that line if:
- Interest is paid unnecessarily
- Repayment is prioritised over charitable activity
- The arrangement benefits the individual more than the charity
Even interest-free loans can raise questions if:
- They create leverage
- They influence decision-making
- They are relied on instead of proper financial planning
The Conflict of Interest Issue
This is where many charities stumble.
If a trustee:
- Lends money
- Is owed money
- Or is repaid money
They must:
- Declare the conflict
- Step back from decisions
- Have everything minuted
Failing to manage conflicts properly is one of the most common findings of the Charity Commission during investigations.
Intent doesn’t remove obligation.
What About Directors Owing Money to the Charity?
This is even more serious.
A director owing money to a charity can be seen as:
- Misuse of charitable funds
- Poor financial control
- Potential misconduct
In commercial companies, this triggers tax issues.
In charities, it triggers trust and governance concerns first.
HMRC Adds Another Layer of Risk
Where DLAs are involved, HMRC may also take interest — particularly if:
- Loans are undocumented
- Repayments are irregular
- Benefits in kind arise
Payroll, benefits, and reporting errors often follow informal arrangements.
What started as “helping out” can quickly become a compliance headache.
Why Trustees Often Don’t Realise the Risk
Most trustees:
- Are volunteers
- Are not finance professionals
- Act out of goodwill
Many assume:
“If it’s helping the charity, it must be fine.”
Unfortunately, charity law doesn’t work on intention alone.
It works on process, documentation, and transparency.
The “Temporary” Myth
Almost every DLA issue begins with the word temporary.
Temporary becomes:
- Unmonitored
- Unplanned
- Unresolved
And eventually:
The longer a loan sits on the balance sheet:
- The harder it is to justify
- The harder it is to unwind
- The greater the trustee exposure
What Regulators Expect to See
If a director’s loan exists, regulators expect:
- Written loan agreements
- Clear repayment terms
- Trustee approval
- Conflict declarations
- Evidence the arrangement benefits the charity
Without these, trustees may be criticised — even if no money is lost.
A Real-World Style Example
A small charity faced delayed funding.
A trustee paid three months of wages personally.
Everyone was grateful.
No loan agreement was created.
A year later, the trustee stepped down and asked for repayment.
The charity struggled:
- Cash was tight
- New trustees were uncomfortable
- Funders questioned governance
No wrongdoing occurred — but the situation became fragile.
All because the support wasn’t structured.
When Loans Can Be Appropriate
There are situations where director loans can be acceptable.
For example:
- Short-term bridging
- Clearly documented
- Interest-free
- Approved in advance
- Repaid promptly
But these should be:
- Rare
- Controlled
- Transparent
Loans should never replace proper cashflow planning or reserves policy.
Better Alternatives to Director Loans
Well-run charities aim to avoid DLAs entirely by:
- Building realistic reserves
- Forecasting cashflow
- Negotiating payment terms
- Staging project delivery
- Planning funding gaps early
Director loans are not a strategy.
They are a last resort.
What Good Governance Looks Like
Charities with strong governance:
- Avoid informal financial arrangements
- Reimburse expenses promptly
- Separate goodwill from finance
- Protect trustees from personal exposure
They recognise that:
Trustees should support the mission — not bankroll it.
Questions Every Trustee Should Ask
If a loan exists (or is being considered), trustees should ask:
- Is this allowed under our governing document?
- Is it in the charity’s best interest?
- Have conflicts been managed?
- Is it documented and time-limited?
- What’s the exit plan?
If those questions can’t be answered confidently — stop.
Why This Matters More Than Ever
Funders, regulators, and the public increasingly expect:
- Professional financial controls
- Clear boundaries
- Trustee accountability
Charities are no longer judged only on impact —
but on how responsibly they are run.
Director’s loan accounts sit right at that intersection.
Final Thought
Helping a charity survive is admirable.
But when help isn’t structured, documented, and governed properly, it can:
- Create personal risk
- Damage trust
- Undermine the very mission it was meant to protect
In charities, clarity is kindness.
To the organisation.
To the trustees.
And to the cause itself.