Is This an Investment Or A “Loan”?

If you read articles with suggestions for people considering starting a business or who have a new one, a lot of them will tell you not to fund your new company by taking on personal debt. This is a valid argument; you don’t want to start off your new venture by adding thousands or even tens of thousands of dollars of personal debt. It can take a long time for a business to become profitable, and most people don’t go into this wanting to spend the first year or more of profit just to get out of the red in their personal life. However, a more serious consideration is that if it fails, there is much more at stake than just dusting yourself off and pivoting to your next endeavor. None of us want to think about the possibility that we won’t be successful, but sometimes things happen that are out of our control. 

With that said, even businesses that require a limited amount of startup funding may require some investment from the new owner. In my business, I run it with zero liabilities. If you’ve read my Liabilities blog post, you know that this means I operate without owing anyone any money. The software and other expenses are all paid for up front. But, when I first started, I did have to pay for some things out of my pocket. This is pretty common, and if you have to do this, you’ll need to make the choice on if you want the business to pay you back. If you decide you don’t want to be paid back, it will end up counting toward the company’s Equity. If you do want to be paid back, it will increase the Liabilities. If you go this route, just make sure that you keep all the receipts for purchases you make with a personal card. 

I do stand by the articles saying you shouldn’t take out big loans or max out all your credit cards to fund your new business, but I also know that it’s possible you might need to buy some supplies to get yourself off the ground or pay to register the company with your state/city. It’s up to you how you want to account for this on the books, so is it an investment or a loan?