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Should You Loan Money from Your Personal Funds to Keep Your Small Business Afloat?

If you’ve hit some roadblocks with your small business, you may find yourself in a cash flow crisis where you need some extra funds to keep your company afloat. Should you loan money to your business from your personal funds? There are several ways you can do this, but it’s important to consider the tax implications and make sure you’re keeping proper records of all transactions.

Options for Loaning Money to Your Small Business

If you decide to loan money to help keep your small business afloat, you have several options. Choose which of these might be available to you and appropriate for your situation:

  • A home equity line of credit. If you’re like many people, you may have most of your net worth tied up in your personal residence. It’s often possible to tap into those funds through a home equity line of credit, especially if you have a lot of equity in your home. Interest rates tend to be lower than most business loans, making this option attractive. However, if the investment in your small business doesn’t pay off, you could end up losing your home.
  • A personal loan. If you have a startup business with little collateral, you’re probably unable to get a business loan. However, your good personal credit standing may make it possible for you to take out a personal loan to keep your business going. These loans typically require less paperwork than business loans, but you may not be able to access enough cash to meet your needs.
  • Borrowing from credit cards. If you only need a small amount of cash to tide your business over or to meet a pressing debt, you may be able to borrow off a personal credit card or take out a business credit card that offers cash withdrawals. You may also be able to put some of your business expenses on a credit card to keep the doors open. Look for promotional APRs or rewards programs to help balance the high interest rates you may have to pay.
  • Pulling cash out of savings. If you have investments you can cash in or plenty of money stashed away in savings, you can tap into it to help your business. When you choose this option, you don’t have to pay interest, though you may end up losing the investment income you’re foregoing. However, loaning money to your own business has the potential to leave you strapped for cash personally.

Requirements and Tax Implications

While loaning your business some cash from personal funds may help you in the short term, check with your tax professional to make sure you understand all the tax implications, which vary depending on the legal way in which your business is set up. You may have to pay interest on the loan, or your ability to take losses from the business may be affected.

Make sure you document every loan you make to your company with all the appropriate paperwork; just writing a cheque to the company isn’t sufficient. Ask your tax professional if there are limits on how much you can or should lend, and document every step you take to pay yourself back.

It’s also important to investigate the tax implications fully if you choose to borrow money from friends or family to meet your small business’s obligations. Such a loan may affect your family member’s taxes in unforeseen ways, so it’s important to treat such a loan professionally by drawing up a promissory note that spells out all repayment requirements. Loaning personal money to your business can be a great short-term solution to a crisis as long as you fully understand the implications of your choices.

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