Putting your own money in: the shareholder current account

For most New Zealand small businesses, the first investor is the owner. Savings go in at the start, profits are left in to fund growth, and when a goal comes along — a new machine, a fit-out, a big stock order — the owner’s own cash is often the first real piece of the mix. business.govt.nz lists bootstrapping and funding from profits as core ways to fund a business.

If your business is a company, how you put that money in, and how you take money out, is recorded in a shareholder current account. Getting it right keeps your tax tidy, protects you if things go wrong and affects how lenders read your business. This guide explains the basics; your accountant should advise on your specific situation.

What is a shareholder current account?

Inland Revenue describes a shareholder current account as an account that tracks the net balance of funds the shareholder has loaned to and withdrawn or borrowed from a company. Think of it as a running tab between you and your company:

• Money in — cash you deposit into the company, company bills you pay personally, salary or dividends credited but not yet paid out.
• Money out — drawings, personal expenses paid by the company, repayments of earlier loans to the company.

At any time the balance is either in credit (the company owes you) or overdrawn (you owe the company).

What does a credit balance mean?

A credit balance means you’ve lent the company money. In funding terms, it’s owner money that the company can use for its goals — but it’s still technically a debt the company owes you. That has a few consequences:

• You may be able to withdraw it later, subject to the company having the cash and any lender agreements.
• It ranks as a creditor claim if the company fails, generally behind secured lenders.
• Lenders notice it. A large credit balance shows the owner has backed the business. But because it could be withdrawn, a lender may ask you to agree to leave it in place while their facility runs.

Some owners prefer to convert part of a credit balance into share capital, which can’t be withdrawn as freely and may look stronger on the balance sheet. Whether that’s sensible depends on your plans — get advice.

What does an overdrawn balance mean?

If you’ve drawn more from the company than you’ve put in or earned through salary and dividends, the account is overdrawn. Inland Revenue says that in this case the company is lending the overdrawn amount to the shareholder, and sets out the consequences:

• If the company charges interest, the interest is taxable income to the company and usually non-deductible to the shareholder, and resident withholding tax obligations may arise.
• If interest is below market or not charged at all, there may be fringe benefit tax or dividend implications. These rules stop shareholders from getting interest-free loans from their companies as a tax advantage.

Inland Revenue also notes a company cannot claim an income tax deduction for drawings taken by its shareholders, because drawings are not an expense.

In practice, overdrawn current accounts are usually cleared at year-end by declaring a salary or dividend — which has its own tax cost. Your accountant manages this, but it’s worth understanding because it affects how much cash the company truly has for your goals.

Why does this matter for a funding mix?

Three reasons.

1. It changes how much owner money is really available

If you’re planning to contribute $30,000 of “your own cash” to a goal, check where it comes from. Cash in the company bank account that you’ll later draw against a credit balance is still company money funding the goal. Cash you’re about to put in from personal savings increases your credit balance. Cash you take out by overdrawing the account creates a debt to the company and possibly a tax cost. Each looks the same in the bank, but they’re very different in the accounts.

2. Lenders read it carefully

When a lender reviews your financial statements, the shareholder current account is one of the first things they check:

• A healthy credit balance suggests the owner has invested in the business.
• An overdrawn balance suggests the owner has been taking more than the business earns, which raises questions about affordability.
• Large swings suggest the line between personal and business money is blurry.

A clean, explained current account makes your one-page funding plan much stronger.

3. It protects the business’s buffer

Owners often fund a goal from the company’s cash and then draw against their current account to cover personal costs, leaving the company without a buffer for wages, GST and the next surprise. Decide in advance how much owner money is going into the goal, and how much stays put.

If you’re at the stage of planning how owner cash and a loan fit together, you can ask a real person to look at the mix without any credit check.

Illustrative example: a Christchurch design firm funds a fit-out

Illustrative only; describes no real business.

A small architecture practice, run through a company owned by two directors, plans a $120,000 office fit-out.

• The company holds $55,000 in its bank account, and the directors’ current accounts are in credit by $40,000 combined.
• The directors agree to leave their credit balances in the company and add $20,000 from personal savings, increasing their credit balance to $60,000.
• The company keeps a $35,000 buffer for wages and GST, so it contributes $40,000 of its own cash.
• The landlord contributes $15,000 to the fit-out.
• A business facility of $45,000 covers the rest. The lender asks the directors to postpone repayment of their current account balances until the facility is repaid, which they agree to.

The directors’ money is visible, documented and committed — exactly what a lender wants to see.

What good habits keep a current account clean?

• Run all business money through the business account. Avoid paying personal costs from the company and vice versa.
• Record contributions properly. When you put money in, tell your bookkeeper so it’s coded to your current account, not as income.
• Pay yourself deliberately. A regular salary or planned dividends make the account more predictable than ad-hoc drawings.
• Watch for overdrawn balances during the year, not just at year-end.
• Document loans to the company. A simple written note of any significant amount you lend, and whether it carries interest, avoids confusion later.
• Review it with your accountant before applying for funding.

What questions should you ask your accountant?

Before you commit owner money to a goal or apply for funding, it’s worth a short conversation covering:

1. What’s the current balance of each shareholder’s current account, and is any of it overdrawn?
2. If it’s overdrawn, how will it be cleared this year — salary, dividend or repayment — and what will that cost in tax?
3. Should new money go in as a loan through the current account, or as share capital?
4. Should the company pay interest on money shareholders lend it, and what are the tax effects either way?
5. If a lender asks us to postpone our current account balances, what does that mean for our personal plans?
6. Are our drawings, salaries and dividends set up so the account stays predictable through the year?

The answers turn “our own money” from a rough figure into a clear, documented piece of the mix.

How does owner money fit with other pieces?

Owner money is an early piece in ordering your funding sources: no repayments, no security, and it shows commitment. But it’s finite and precious — once it’s spent, it isn’t available for the next emergency. For very young businesses, owner money often carries more of the mix; see the young business stack. If the goal needs more than you can put in, a partner or investor is the equity alternative, and the repayment load test checks whether a loan piece is affordable alongside your own contribution.

Ready to combine your own money with the right loan piece?

Once your contribution is clear — how much, from where, and whether it stays in — the gap left is the number to fund. Tell us the goal, your contribution and the gap. There’s no credit check when you start, your enquiry stays with a real person rather than being blasted to a list of lenders, and we’ll talk through how a facility fits around your own money. Please describe your contribution accurately on the form; it helps us match the right structure first time.