The difference between investing and loaning money to your business
As a new business owner, you might need to finance your business using your personal savings if you don’t need a bank loan or know how to get a loan in Nigeria. If you are getting into a partnership, a capital contribution is usually required, and the lender will like to see that you have some of your own personal money as a stake in the business.
But the real question is, should that ‘personal money’ be a loan or should the business be taken as one of your investment opportunities?
Making an investment to your business
One option for putting money into your business is to invest the money. In this case, the money goes into your owner’s equity account or into a retained earnings account.
If you withdraw your contribution, you may have capital gains tax to pay if there is an increase in the price of the shares. If you withdraw additional money in the form of bonuses, dividends, or draw, you will be taxed on these amounts. There is no tax consequence to the business on this investment.
Making a loan to your business
If you want to loan money to your business, you should have your attorney draw up paperwork to define the terms of the loan, including repayment and consequences
For tax purposes, a loan from you to your business must be an “arms-length” transaction, being treated like any other debt. It should be clear that the loan is a binding obligation on the part of the company. You can make this easier for yourself by exploring some platforms that grant instant online loans in Nigeria.