I’ll walk you through the process of putting personal money into a business, from opening a business bank account and determining the source of personal funds—to transferring those funds to a business bank account and recording the transaction. Many business owners opt to put personal money into their businesses to cover startup costs and other expenses. If you plan on doing the same, follow the steps outlined below to manage the funds properly and to avoid any tax penalties or other legal obligations.
To help you track this transfer of funds, we recommend using financial management software such as Wave Financial. It offers several tools for small businesses, including accounting, invoicing, payroll, payment processing, and receipt scanning. Free options are available depending on your needs, and you can read our guide on Wave Financial to learn more.
Step 1: Open a Business Bank Account
When using your own money to start a business, you’ll need a business bank account to separate your personal and business finances properly. Not only will doing so make it easier overall to track expenses, but it will also be vital for income and tax reporting purposes. Notably, it can also limit your personal liability for business debts.
When opening a business bank account, we recommend considering Bluevine. It made our list of the best small business checking accounts as it has no monthly or overdraft fees, offers unlimited transactions, and allows you to earn 2.0% interest on balances up to $250,000 on its Standard Checking account.
Types of Business Bank Accounts
There are two types of bank accounts you should consider: a business checking account and a business savings account. You can choose to open one or both, as they have varying uses. Also, each has its pros and cons concerning interest rates, ease of access to funds, minimum balance requirements, and more.
Most business owners open a business checking account first as it offers more flexibility in terms of accessing funds, but a savings account can also be useful depending on your business needs. Below is a quick comparison of a typical business checking account versus a business savings account.
Business Checking | Business Savings | |
|---|---|---|
Best For | Daily expenses, regular withdrawals | Long-term savings |
0% to 1% | 4% to 5% | |
Transaction/Withdrawal Limits | Unlimited | 6 per month |
Minimum Balance Required | None | None |
FDICFederal Deposit Insurance Corp.Coverage | Yes | Yes |
Debit Card Provided | Yes | No |
If you need a resource to help you choose a bank and prepare for opening an account, check out our guide on how to open a business bank account. It provides actionable steps to open an account, along with insight into what to look for when deciding if a bank is the best choice for your business. Some criteria to consider include fees, geographical location, and customer reviews.
Step 2: Determine the Source of Personal Funds
Once you’ve identified your business needs and selected the business bank account that’s best for you, you’ll need to decide on the source of your personal funds before initiating a transfer. This can be as simple as taking funds from a personal bank account, using personal loan proceeds, financing via a credit card, and more.
Here are some common sources of funding for a business bank account, along with a comparison table highlighting typical features and requirements.
Funding Source | Interest Rate | Funding Speed | Loan Amount | Credit Score | Time in Business | Loan Term |
|---|---|---|---|---|---|---|
N/A | 2 to 3 weeks | N/A | None | None | N/A | |
Credit Card | 20% to 30% | 7 to 10 days | $5,000 to $75,000 | 700 | None | Revolving |
7% to 9% | 30 to 45 days | $25,000 to $500,000 | 680 | 2 years | 30 years | |
Personal Loan | 5% to 36% | 24 hours | $100,000 | 660 | None | 7 years |
Friends & Family Loan | Varies | Varies | Varies | None | Varies | Varies |
Personal Savings | N/A | N/A | N/A | N/A | N/A | N/A |
If you choose to fund your business with a loan, we recommend reading our article on how to get a small business loan to improve your approval odds for the best rates available.
A Rollover for Business Startups (ROBS) allows access to your retirement accounts without the associated penalties or tax requirements typically necessary for an early withdrawal. It’s not considered a loan, so there are no interest accrual and monthly payment obligations. Qualification requirements typically include that there be a $50,000 balance in your retirement account and that your business be structured as a C Corporation (C-corp).
Utilizing a ROBS can be tricky if not properly managed. There are specific tax regulations that will need to be taken into account and to avoid any fines or penalties, you should utilize the services of a ROBS provider. Should you need a resource, check out our top-recommended ROBS providers.
| PROS | CONS |
|---|---|
| Access your retirement funds tax-free and penalty-free | Risk of losing retirement funds if the business fails |
| No time in business requirement | Must be a C-corp to qualify |
| Allows for debt-free funding of business for higher monthly cash flows | Must maintain annual requirements to avoid taxes and penalties |
You may be eligible for a business credit card if you have good personal credit. This is a solid option for startups that have limited access to capital and that can provide a personal guarantee. Keep in mind that a business credit card should be used strictly for business expenses so that you’re not personally liable for accumulated debt.
They can be ideal for business expenses that you can pay off in the short term and can be utilized on a revolving, as-needed basis. Interest rates vary, generally anywhere from 20% to 30%. Depending on your desired credit limit and terms of use, you should choose a business credit card that serves your business needs. See our picks for the best small business credit cards to find one that works for you.
| PROS | CONS |
|---|---|
| Can be a quick way to access funds for your business | Interest rates can be high after introductory rates expire |
| Good for new businesses that don’t have enough business credit yet | Your personal credit is on the line and can be damaged if payments are late |
| Ongoing rewards can help your business save money or earn bonuses | Credit limits are usually very low compared to loans and lines of credit |
If you’re a qualified homeowner, you can utilize a home equity loan (HELOAN) or a home equity line of credit (HELOC) to support your business financially. Requirements will vary depending on the lender; however, you can typically borrow up to 95% of your home’s value. You will need to have sufficient equity in the home and good personal credit to be eligible.
A HELOAN and HELOC both borrow against the equity in your home, although there are some differences between the two:
HELOAN Terms | HELOC Terms |
|---|---|
Lump sum disbursem*nt | Flexible access to loan funds as needed |
Fixed interest rate | Variable interest rate based on the prime rate |
Monthly scheduled principal and interest payments for the term of the loan | Loan funds can be borrowed and repaid on a revolving basis |
Amortization period of up to 30 years | Draw period (usually 10 years) |
Proceeds are used to finance large expenses | Uses include short-term or emergency expenses |
Borrowing against your home comes with risks, as your residence will be at stake if your business fails. Consider this before taking this route and determine if there are any alternatives better suited for your business.
| PROS | CONS |
|---|---|
| Less expensive than other financing options | Tied to homeownership |
| Available for startups | Your home is at risk if you default |
| No restrictions on how funds are used | Requires strong personal credit to qualify |
You can reference our articles on how to get a HELOAN and how to use a HELOC to help guide you through each process.
Personal loans are an option if you’re unable to obtain traditional financing provided by startup business loans. They are typically easier to qualify for since they are tied to your personal credit history and are usually more accessible from a variety of lending institutions.
Application and approval are generally quick processes, although lenders have varying rates, terms, and qualification criteria. Keep in mind that personal loans may offer lower loan amounts than business loans but can still be useful for startup costs or other business expenses. To find a lender best suited for your needs, check out our roundup of the best personal loans for business funding.
| PROS | CONS |
|---|---|
| Available to startups with limited resources | Personal credit is at risk if you default on the loan |
| Same-day funding is often available | Smaller loan amounts in comparison to business loans |
| No or limited collateral requirements | Potential for tax or legal issues if funds aren’t transferred properly |
Raising funds from friends and family is a low-risk funding opportunity that allows you access to capital without the rigorous qualification requirements of standard business loans. This is particularly useful for business owners with bad credit or limited resources.
There are a few ways to structure how the funds will be granted, whether you receive a gift or a loan, and you’ll likely still need to repay the funds, albeit at a lower interest rate than most lending institutions. Keep in mind that there are still tax regulations to follow when utilizing this funding source, whether for a gift or a loan.
| PROS | CONS |
|---|---|
| Available to new businesses with limited capital and credit history | Potential for tax liabilities if transactions aren’t properly recorded |
| Less formal than traditional loans offered by banks | Personal relationships can become strained in the event of default |
| Flexibility of returns such as loan repayment or equity stakes | Investors may offer unwanted business advice |
To learn more about the steps to getting funding this way, see our instructional guide on raising money from friends and family to fund your business.
Your personal savings are likely the most accessible way to fund your business, with no debt obligations or strings attached. Depending on the amount of funds you transfer, it can support your cash flow and help cover business expenses.
That being said, you run the risk of a return on your investment in the instance your business fails or you’ve exhausted the entirety of your savings. This can put your personal expenses at risk as well, so be sure to plan accordingly and only transfer what you can afford; otherwise, you might have no way of repaying both business and personal debts.
| PROS | CONS |
|---|---|
| Should be able to access funds same-day | Putting personal savings at risk in your business |
| No obligation to pay back funds right away | Amount of funds available limited to what you have in savings |
| Flexible loan repayment if it is structured as a loan | Can cause tax issues depending on if it is a loan or an equity contribution |
Step 3: Transfer Personal Funds Into Your Business Bank Account
Once you’ve chosen your funding source, you can begin the process of transferring your personal funds into your business. This can be categorized in one of two ways: either as an equity injection or a loan. Most of the time, business owners consider the transaction as equity, which requires no repayment. It acts as an investment into the business, and the success of the business serves as the return on investment.
There are also various accounting practices you’ll need to consider depending on the method you choose, whether you opt for equity or debt. You should maintain accurate records of any transfers or payments, as it will help you keep your balance sheet and taxes faultless.
Step 4: Record the Transaction in Your Accounting Software
Once the transfer of funds is complete, you’ll need to track it properly for accounting purposes. We recommend accounting software like Wave Accounting. It was selected for our list of the best small business accounting software as it is free for accounting and invoicing. Paid features include payroll, bookkeeping support, coaching, and mobile receipts. You can learn more about it through our review of Wave.
Using reliable accounting software consistently will help you when it comes time to file your business taxes, as you’ll be able to complete your taxes more quickly and more accurately. For guidance, see our article on how to choose the right accounting software for your business.
What to Consider When Putting Personal Money Into Your Business
You’ll need to ensure you’re in compliance with any transaction you initiate between your personal and business finances. This includes tax regulations, balance sheet reporting, and other financial implications. It’s worthwhile to consult a financial advisor to help you navigate the process and further mitigate any potential risks.
1. Risk of Using Personal Assets
Business failure can put your personal finances in jeopardy—and recovering your personal funds or assets can be challenging if you’ve injected most of your savings or used other funding sources to finance your business expenses. You should ensure that you have a financial cushion outside of the funds you choose to transfer to your business in case you don’t see a return.
That being said, the personal risk is all the more reason to consult a financial advisor. They can help you plan around all your financial goals that could potentially be impacted, such as saving for the down payment on a home, your kid’s college tuition, your retirement, or reserves to cover potential emergencies and unexpected personal expenses.
2. Timing of the Transfer & Tax Implications
Depending on the time of year and your business calendar year, you may be able to time the transfer of funds to maximize tax benefits. This typically comes into play if you decide to sell your ownership in the business, or if you funded the business with a personal loan and receive interest payments from the company. In some cases, your payout could be affected in the event your business is sold or dividends are paid out to owners.
3. Business Legal Structure
There are various ways to structure your business, whether as a corporation, a sole proprietorship, a limited liability company (LLC), etc. There are certain tax and legal obligations tied to each structure, and there are varying advantages and disadvantages depending on how you operate. Be sure to familiarize yourself with your intended business structure and the tax and legal requirements that follow.
The advantage of some of these business structures, such as LLCs and corporations, is the ability to protect business owners from being personally liable for business debts. See our LLC vs S-corp vs C-corp comparison to learn how they differ.
4. Structuring Your Investment as a Loan
If you choose to structure your funds transfer as a loan, you’ll have to take legal precautions and draft paperwork that documents repayment terms owed by the business. You’ll need to outline a payment schedule and define an interest rate that corresponds with the loan amount provided. For personal tax purposes, keep in mind that any interest payments you make will be considered income.
Loans have a tax benefit for the business that a contribution doesn’t provide, as interest on a business loan is tax deductible. If you are a sole proprietor and lend money to your business from your savings, the interest deducted on your business return or Schedule C must be reported as income on your personal tax return. In this case, there’s no personal tax benefit.
Pros & Cons of Putting Personal Money Into a Business
| PROS | CONS |
|---|---|
| Lets you access money for your business quickly in most cases, except for ROBS | Puts your personal finances and credit at risk |
| Can allow you to get funding before your business has credit or income to get business financing | Limits you to your personal credit and income, or the amount of retirement funds you have |
| Makes you even more committed to the success of the business because you're using personal funds | Comes with possible tax implications when borrowing money or selling shares |
Frequently Asked Questions (FAQs)
Yes. Once you’ve established a business checking account, you can transfer funds from your personal checking or savings accounts. Other funding sources such as loan proceeds or retirement accounts may be a bit more complicated to transfer but generally can be applicable for transfer to your LLC.
Yes. You should adamantly record any funds transfers for both compliance and tax purposes. It also helps keep your funds organized and easier to reference.
Depending on the personal funding source you use, there’s some risk you won’t receive returns or be unable to repay existing debts. Your ability to repay personal expenses can also be at risk if you exhaust your funding source for your business.
Bottom Line
For business owners with the means, putting personal money into a business is an accessible financing option for new small or startup businesses. There are various sources of personal funds, whether it be personal savings, loan proceeds, or retirement accounts. Ensure you follow the steps outlined above and are equipped to manage the potential risks associated before proceeding with using your own money to start a business.
