If you are a new business owner, then you probably need some money to invest in your company from personal savings. A lot of people tend to use what is called an “infusion of capital” instead of a loan, to get the business off the ground.
Even if you get financial help from friends and family, or you borrow it from a bank, you still need to invest your own money.
On the other hand, for people who are joining a partnership, a capital contribution is often required. In that case, the lender will want to make sure whether you have some collateral to back up the investment.
So, let’s discuss the differences and possible outcome!
Loaning money to your business
Before you start this procedure, make sure your lawyer sets up all the paperwork, where he will define the terms of the loan. It includes the amount, repayment, as well as consequences. Even though this might seem ridiculous, you should treat this transaction like any other debt.In the eyes of the law, things should be clear and transparent. Without a contract, the IRS may deny the validity of your loan.
Investing money in your business
Another option you can explore is investing money in your business. In this way, the funds go straight to the owner’s equity account, if you are the sole owner. On the other hand, if you are part of a corporation, then money goes into retained earnings.
However, if you decide to withdraw your investment, then you might have to pay the tax.
Loan and investment – what are the risk and benefits
Each decision carries certain risks, but it’s up to you to decide which course of action you would like to take. Of course, the most significant risk is losing your money, and that’s always a possibility, regardless of the investment you are about to make.
When you loan money, you become a creditor. Depending on whether the money is secured or unsecured, you may or may not be able to get your investment back. However, if the loan is secured, you can get your money.
On the other hand, if you invest funds in the business, and it fails, then there is no possibility of returning those funds.But, there are a couple of perks, as well. If your company is just starting, by loaning the money, you don’t have an obligation to return those fund right away.