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You’re passionate about your product so it’s only natural to have some skin in the game by putting money into your startup company.
Just use your funds, transfer them to your company’s bank account and pay yourself back later, right?
Well, yes kinda, but not always … and you’ll want to keep a clean record of it and protect yourself with documentation.
Up until the point you have investors involved, if your startup has enough cash to pay back your initial loan, great … simply pay it back.
When you’re in the market for investors though, it’s a different story.
Investors are interested in putting their money into a startup in order to fund future growth, not to pay back loans. So if you do still have loans, investors can ask you to “make them go away”. In other words: write off any chance of paying yourself back.
If, and it’s a big if, investors don’t do this, they’ll usually wrap your loan up in agreements that say it can’t be paid back until you reach certain revenue or capital targets, or on exit.
In any case, you should practice good record keeping for any money you put into your company for several reasons, namely:
- Investors want to see that you have your books in order and you’re organised
- It proves that you have backed your company (which investors also want to see)
- It’s important if you’re applying for the R&D tax incentive (one of the main sources of startup funding)
So, here’s what we recommend when putting money into your startup company.
- If you’re putting in a lump sum, have a loan agreement that covers interest rates (if any) and repayment terms. A startup friendly lawyer should not charge you the earth for this
- If you’re using a spreadsheet to manage your finances, record the initial loan details in it (amount and date lent) and record every repayment (amount and date paid)
If you’re using accounting software like Xero to manage your finances, set up a loan liability account to record founder loans and repayments
There might be times when founders or other employees use their own funds, bank accounts or credit cards to cover company expenses, especially in the early days when just starting out (sometimes before a company even has its own bank account).
In essence, this is just another form of loan to your own startup. We recommend that you ‘bring this to book’ as set out below – especially where these personally paid expenses should be included in any R&D tax incentive claim.
- If you’re using a spreadsheet to manage your finances, record the expenses you’ve covered in it and record any payments back to yourself (amount, what for and date)
- If you’re using Xero:
Set you (or your cofounders/employees – whoever is covering the expenses) up as a supplier called something like ‘Mary Jones Expense Report’. Then enter any expenses as a ‘supplier bill’, and ‘pay’ it (i.e. add it to) the loan account – see our FAQ on this for more detail.
There’s some other great software available to make managing expenses even easier, namely Receipt Bank. You/your employees can ‘snap n send’ receipts or invoices on your phones or via email. They are then exported into Xero and processed there.
Hang on a minute, isn’t founder money an investment?
It can be, especially for lump sums (just like any other shareholder), but not always and most founders simply transfer the cash and try to sort it out later.
We do recommend recording the amount you’ve put into your own startup, even if investors ask you to make it go away down the track, because (even apart from R&D reasons) it’s still good to show investors that you’ve been backing yourself in your own startup.
What about tax?
If you’re loaning money to your startup, there are a few things to be aware of at tax time:
- Your company will be able to claim a deduction for any interest expense; BUT
- You (through your personal tax return) will also need to to declare it as your interest income
If you do pay yourself back any of your loan, it is not regarded as personal income so this doesn’t have any tax implications. If loans are written off (technically ‘forgiven’) you’ll need to seek tax guidance on its treatment.
As always, please don’t take our articles as personal tax advice. Speak to us for that.
Can your startup company lend you money?
Yes, your startup can (temporarily) loan money to you as a founder.
You”ll need to make sure you record this too (as explained above) and you should try to avoid having any net loans outstanding to founders at the end of the financial year because you’ll have to deal with the ATO’s Division 7A regulations, which say that the loan is effectively income … on which you’ll pay tax.
Want to really understand startup funding?
The Startup Founders Guide to Startup Funding
Your practical step-by-step ebook to understand how startup funding works plus how and when to get it.
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