When you are considering converting a sole trader to a limited company, your thoughts quickly turn to tax and the notary. But what actually happens to your financing and your relationship with the bank? This is an aspect that catches many entrepreneurs off guard, and one where it pays to act sooner rather than later.
A limited company is a new legal entity: what does that mean for your bank?
A limited company is not an extension of your sole trader business, but an entirely new legal entity. Your bank will therefore treat the limited company as a new client, with its own credit profile and its own administration. This has direct consequences for existing arrangements and products you held as a sole trader.
Your current business account, any credit facilities and overdraft arrangements are all held in the name of the sole trader. After the conversion, these do not automatically lapse by operation of law, but they cannot simply be transferred either. The bank will need to assess afresh whether it wishes to do business with the limited company, and on what terms.
Existing loans and credit facilities: what changes
Do you have a business loan or credit line in place as a sole trader? If so, it is wise to inform your bank well in advance of the forthcoming conversion. In most cases, the bank will not automatically transfer the loan to the limited company. There are a few possible scenarios:
- The bank issues a new loan in the name of the limited company, with you potentially required to provide a personal guarantee as director-shareholder.
- The existing loan temporarily remains in your name, whilst the limited company takes over the repayments through an internal arrangement.
- The bank requests additional security because the limited company does not yet have a track record.
Bear in mind that banks scrutinise a newly formed limited company more carefully than an established business. Annual accounts, forecasts and a clear business structure will help you make a credible impression.
Personal guarantees and personal liability
One of the reasons for making the move to a limited company is the limitation of personal liability. Nevertheless, when providing finance to a newly formed limited company, banks frequently ask for a personal guarantee from the director-shareholder. This means that in practice you may still be personally liable if the limited company is unable to repay the loan.
This need not be a reason to put off the conversion, but it is important to factor this in consciously when weighing up your options. Discuss with an adviser what security you are prepared to offer and what the implications are for your personal financial position.
Opening a bank account for the limited company
Once the limited company has been incorporated, you will need a business bank account in its name. Most banks require the deed of incorporation and an extract from the Chamber of Commerce for this purpose. Practical tips for a smooth start:
Plan een vrijblijvend gesprek en ontdek wat we voor je kunnen betekenen.
Plan een gesprek- Apply for the bank account as early as possible; this can sometimes take several weeks.
- Ensure that your Chamber of Commerce registration and deed of incorporation are immediately available after signing at the notary.
- Also inform suppliers and clients of your new account details in good time.
- Do not close your old business account until all payments and direct debits have been transferred.
- Check whether direct debits need to be re-authorised by your limited company.
Current account relationship between you and the limited company
After the conversion, as director-shareholder you may borrow money from your own limited company, or indeed lend money to it. This is handled through what is known as the current account relationship. It is important that you apply a commercial rate of interest and set out clear arrangements in writing. HMRC keeps a close eye on this, and non-commercial loans can have tax consequences.
Ensure that the administration of the current account is properly maintained. This will help you avoid disputes with the tax authorities and keep the financial relationship between yourself personally and the limited company transparent.
Applying for finance as a newly formed limited company: how to strengthen your application
Do you have plans to raise new finance after the conversion? Arriving at the bank well prepared will stand you in good stead. A few practical steps:
- Commission thorough tax advice so that your tax position is clearly set out.
- Prepare an up-to-date forecast with well-founded revenue and cost projections.
- Ensure a sound opening balance sheet for the limited company, prepared by an adviser.
- Bring the historical figures from your sole trader business; banks are keen to see a proven track record.
- Be transparent about the reason for the conversion and your plans for the future.
The stronger your application, the better your negotiating position. A well-prepared entrepreneur inspires far more confidence than someone who comes to the table with fragmented information.
Why Belastingadviseur Eindhoven
At Belastingadviseur Eindhoven, we guide entrepreneurs in the region through every step of converting a sole trader business to a limited company, including the financial and tax considerations involved. We work with you to think through the structure, the administration and how to communicate with your bank, so that you can enter this new phase with confidence.
Do you have questions about your specific situation? Please feel free to contact us without obligation. We are happy to help.
Frequently asked questions
Can my existing business loan be transferred to the limited company?
This depends on your bank. In most cases, an existing loan is not transferred automatically; instead, the limited company must submit a fresh application. Inform your bank of the conversion in good time and discuss the available options.
Do I need to provide a personal guarantee as director-shareholder for a loan taken out by the limited company?
Banks frequently ask for a personal guarantee from the director-shareholder when dealing with newly formed limited companies. This is not a legal requirement, but it is common practice when the company has little track record as yet. Take advice on the terms before you sign anything.
How long does it take to open a business bank account for a limited company?
This varies from bank to bank, but allow at least one to four weeks after incorporation. Start this process as early as possible to avoid disruption to your business operations.
What is a current account relationship and why does it matter?
A current account is an internal flow of funds between you as director-shareholder and your limited company. It is important that you charge a commercial rate of interest and keep thorough records of everything, as the tax authorities scrutinise non-commercial arrangements closely.
We are happy to think along with you. For advice tailored to your situation we would gladly sit down with you. No rights can be derived from the content of this page and it may contain inaccuracies.
