The Difference Between Investing and Lending 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 loans 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 an investment?

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

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.

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