If you’re interested in using your own money to start a business, you’ll need to open a business bank account, select your funding source, provide instructions for completing the transfer, and then record it for accounting purposes. Each of these steps involves certain nuances as well as additional considerations that can impact your ability to utilize these funds. This guide will go through each step to minimize complications you may run into.
Following the steps in this guide can help ensure that nothing is overlooked when it comes to tax reporting, audits, or other reviews of your personal and business financial records. To this end, I personally recommend using financial management software like Wave Financial as it provides a number of tools for business owners such as accounting, invoicing, payroll, payment processing, and receipt scanning.
Step 1: Open a Business Bank Account
One of the first steps to putting personal money into a business is to open a separate business bank account. This helps you more accurately keep track of your business expenses when it comes time to file taxes and can also protect your personal assets from liability in the event your business fails. This can also provide more credibility to your company and make budgeting easier, something we discuss in our guide on separating personal and business finances.
Types of Business Bank Accounts
You can choose between two main types of business bank accounts: a checking account and a savings account.
I recommend starting with a business checking account because it allows for more flexibility with daily transactions, withdrawals, and working capital needs. A business savings account, on the other hand, can be the better option for placing financial reserves for quick and easy access to cover unexpected expenses.
Below is a quick comparison of the features between a typical business checking account and a business savings account.
How to Choose a Bank
You’ll have many options to choose from when it comes to deciding where to bank. If you’re unsure where to start, you can consider our roundup of the best small business checking accounts. There, we provide recommendations on the banks with the best rates, features, and services to suit your business needs. U.S. Bank, for instance, was selected as the best overall account for free checking and for companies with low transaction volumes.
Visit U.S. Bank Member FDIC.
In addition to the recommendations we’ve provided above, it’s a good idea to consider what features would suit your business needs. Below are some common categories to consider:
When choosing a bank, think about whether it offers any form of insurance for deposited funds, as well as how much the insurance is for. FDIC and NCUA insurance are the most common and are designed to protect your money in the event of a bank failure. Common insurance limits are $250,000 per depositor, per bank.
For this category, I recommend considering customer reviews and ratings on third-party sites to determine the level and type of experience you’re likely to have. This can provide insight into things like the bank’s responsiveness when it comes to resolving or addressing issues, as well as flexibility for things like fee waivers and policy exceptions.
Different banks offer varying features, rates, and fees for their banking products. I recommend thinking about how you plan on using your account and then shopping multiple banks to find the one best suited for your needs. Below are items that will apply to a majority of business owners:
- Interest rates and fees
- Minimum balance requirements
- Monthly transaction limits, if applicable
- Cash deposit, mobile check deposits, and cash withdrawal limits
- Ease of use of online dashboard or mobile banking availability
Being able to conduct most of your business transactions at the same bank can simplify your day-to-day as a business owner, so you should see what else your bank offers. Some examples can include lending products, financial planning, credit repair, and bookkeeping services.
Some banks may offer incentives to attract new customers. For checking and savings accounts, this can often include a welcome bonus if you deposit a certain amount of funds by a certain timeframe and complete certain qualifying transactions such as debit card purchases or bank account deposits.
A bank’s customer service hours of operation can potentially impact your own business operations if you run into an issue and need help in resolving it quickly. In addition to its operating hours, you should consider whether it has availability by phone, email, or online chat. I also recommend looking at a bank’s physical branch locations as some issues may require you to go in person.
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 |
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).
| 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 HELOAN or a HELOC to support your business financially. Requirements will vary depending on the lender, and 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.
There are some differences between a HELOAN and a HELOC.
HELOAN Terms | HELOC Terms |
|---|---|
Lump sum disbursement | 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 |
Note that 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 |
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 business 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 |
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: Initiate and Verify the Transfer of Funds
In transferring your funds, you can choose to have it done as either an equity injection or a loan to the business.
Equity Injection
Using personal money to fund a business is commonly done as an equity injection as it does not require repayment. It’s also much simpler to track and manage, as it acts as an investment into the business, with the company’s success serving as its own return on investment.
Loan to the Business
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.
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.
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.
Implications of Improperly Recording the Transaction
It can be easy to do, but overlooking the importance of not doing your due diligence in recording the transaction can be costly as it can result in fines and penalties from the Internal Revenue Service. Even if there are no financial implications, it can result in added paperwork in the event of an audit to perform the corrections. Finally, depending on the size of the transaction, it can skew the financial figures of your business, giving you an inaccurate view of how your company is performing.
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, and your retirement or having 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.
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)
Liability protection and separation of business and personal transactions are two primary reasons you should get a business bank account. Intermingling personal and business transactions can result in you being held personally liable for the company’s debts. Additionally, having a separate business bank account makes it easier to identify business-related transactions when it comes to filing taxes.
This depends on a number of factors such as the tax structure of your business, the purpose of the funds, the manner in which the funds are transferred, and how the funds will be classified. Due to the complex nature of tax rules and regulations, it’s recommended that you contact an accountant to review your specific circumstances.
One of the biggest risks is that you could lose your personal funds in the event your business fails. Additionally, if you fail to separate your personal and business finances, your personal assets could be used to settle business debts.
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.
