Founder Loans to the Company Explained
Plenty of companies are kept alive in their first year by the founder's own savings. Sometimes that money goes in as equity, but often it goes in as a loan, promised back "when things pick up." Done properly, a founder loan is a perfectly sensible tool. Done casually, it can cause tax headaches and awkward questions when investors arrive. Here is how to get it right.
Key takeaways
- A founder loan is money you lend to your own company, to be repaid later. It is not the same as buying shares.
- Document every loan with a written note that states the amount, interest, repayment terms and what happens if the company is sold or raises money.
- In the US, charging interest at least at the applicable federal rate (AFR) avoids imputed interest issues. In the UK, a director's loan account records money flowing between director and company.
- Investors will ask about founder loans during diligence, so decide early whether yours will be repaid, converted or left in place.
The first working week of January is when many founders sit down with the previous year's numbers. If you look at your bank statements and see transfers from your personal account labeled "top up" or "cover payroll," this article is for you. Those transfers are already a loan, a gift, or an equity investment in someone's eyes. The aim is to make sure everyone, including the tax authorities and your future investors, sees them the same way you do.
As always with money and tax topics, this is general information, not legal or tax advice. Rules differ by country and by company type, so please check your situation with a qualified accountant or lawyer.
What a founder loan is, and what it is not
A founder loan happens when you, as an individual, lend money to the company you own or run. The company owes you that money, and it should appear as a liability on the balance sheet. When the company has cash to spare, it repays you, possibly with interest.
It helps to compare a founder loan with the other ways money can move from you into the business:
| Founder loan | Equity investment | Personal guarantee | |
|---|---|---|---|
| What you get | A promise of repayment, maybe with interest | More shares or a larger ownership stake | Nothing directly; you back someone else's loan |
| Where it sits | Liability on the company's balance sheet | Equity on the balance sheet | Off the company's books until called |
| Your risk | You may not be repaid if the company fails | Shares may become worthless | You are personally liable if the business cannot repay |
Founders sometimes combine these. You might lend money now, sign a personal guarantee on a bank facility, and later convert some of your loan into shares. Each step should be written down separately.
The structure of your company matters
For sole proprietors and partners, there is no separate company to lend to; money you put in is simply your capital in the business, and you take draws. Founder loans are mostly relevant to companies, such as US C-Corps and LLCs or UK limited companies, where the business is a separate legal person. If you are not sure which applies to you, sort that out first.
Why documentation is non-negotiable
A loan you can prove is a loan. A transfer with no paperwork is open to interpretation. Without a written note, tax authorities may treat the money as a capital contribution, and repayments may be viewed as distributions or taxable income. Investors and acquirers may also question whether the company really owes you anything.
A short written loan agreement, often called a promissory note, solves most of this. It does not need to be long, but it should be signed by you and by the company, ideally with board approval recorded in your minutes.
What a founder loan note should include
- Parties: you as lender and the company as borrower.
- Amount: a fixed sum, or a maximum if you will lend in several transfers.
- Interest: the rate and how it accrues. In the US, a rate at least equal to the AFR avoids imputed interest issues.
- Repayment terms: a date, a schedule, or "on demand," plus any conditions.
- Priority: whether your loan ranks behind bank debt or other lenders.
- What happens on a raise or sale: repayment, conversion into shares, or staying in place.
- Signatures and approval: including a board resolution if you have a board.
Common mistake
Writing the note after the money has already gone in, with no reference to the actual transfers. If you are documenting past loans, list each transfer by date and amount in a schedule attached to the note, so the paper trail matches the bank records exactly.
Interest: charging it, and why it matters
It can feel odd to charge interest to your own company. But interest is part of what makes a loan look like a loan, and in some countries an interest-free loan can create tax consequences.
In the US
The IRS publishes the applicable federal rates each month. Charging interest at least at the relevant AFR on a founder loan helps avoid imputed interest issues, where the tax rules treat you as if you had received interest even though you did not. Interest the company pays you is generally taxable income for you and may be deductible for the company. Check the current AFR and the rules with your accountant before you set a rate.
In the UK
Money moving between a director and their company is recorded in a director's loan account. If you lend money to your company, the account shows the company owes you. If you take money out that is not salary, dividends or expense repayments, the account can go the other way, meaning you owe the company, which has its own tax rules. Interest you charge your company may be taxable for you. Ask your accountant how to treat it.
Pro tip
Ask your bookkeeper to set up a dedicated liability account named "Loan from [your name]" and to code every transfer you make into it. Then reconcile it each month against your loan schedule. Clean books make every later conversation, from tax returns to due diligence, much easier.
How to set up a founder loan, step by step
- Decide loan or equity. If you want the money back at some point and do not want more shares, a loan is the right label. If you want more ownership, talk to your lawyer about issuing shares instead.
- Agree the terms. Amount, interest, repayment and what happens on a raise or sale.
- Write the note. Use a template from your lawyer or accountant rather than drafting from scratch.
- Get approval. Record a board resolution, especially if you have co-founders or investors.
- Transfer the money from your personal account to the company's business account, with a clear reference such as "Founder loan 1."
- Record it in the books as a liability, not as revenue or equity.
- Track interest and repayments in a loan register and review it with your accountant at year end.
A founder loan register template
Keep this alongside your cap table. The rows use made-up example amounts and dates.
| Date | Type | Amount | Interest basis | Running balance | Note or approval reference |
|---|---|---|---|---|---|
| 2027-03-01 | Loan advance | $20,000 (example) | Per note, at least AFR (US) | $20,000 | Note 1, board resolution 2027-02-25 |
| 2027-07-15 | Loan advance | $10,000 (example) | Per note, at least AFR (US) | $30,000 | Note 1, schedule item 2 |
| 2027-12-20 | Repayment | -$5,000 (example) | n/a | $25,000 | Board resolution 2027-12-15 |
Add a column for accrued interest if your note lets interest build up rather than paying it monthly. Keep these records for as long as your local rules require. In the US, the IRS generally expects records to be kept for at least 3 years after filing, and longer in some cases. In the UK, companies keep records for 6 years from the end of the financial year.
Example
Imagine Tomas, who runs a small hardware startup set up as a Delaware C-Corp. Over his first year he moved $30,000 (example amount) from his savings into the company in two transfers, with no paperwork. In January he asks his lawyer to prepare a promissory note covering both transfers, with a schedule listing each date and amount, an interest rate at least equal to the AFR, and a clause saying the loan can be repaid or converted at the next priced round. The board, which is Tomas and his co-founder, approves it in writing, and his bookkeeper moves both transfers into a "Loan from founder" liability account. When a seed investor later asks about it, Tomas sends the note and the register in one email. (Names and figures are made up.)
What happens to founder loans when you raise
Investors will see founder loans in your financials and data room. They want to know that the new money will build the business rather than simply repay you. Expect a conversation about one of these options.
Leave the loan in place
The loan stays on the balance sheet and is repaid later on agreed terms. Investors may ask for it to rank behind other debt, or for repayments to need their consent. Investor consent rights often cover debt above a threshold, so check your term sheet.
Convert the loan into shares
Some founders convert their loan into equity at the round price or on the same terms as the new investors. This cleans up the balance sheet and increases your ownership. It also has tax and dilution effects, so model it before agreeing.
Repay part or all of it from the round
Some investors accept a partial repayment, especially if the loan was used for clear business costs. Many will push back on full repayment from new money. Raise the topic early, ideally before the term sheet, so it does not become a surprise late in the process.
Common mistake
Repaying yourself quietly just before or just after a round closes. Even if it is legally allowed, it can damage trust if investors learn about it from the bank statements. If you plan to repay any of your loan, disclose it and agree it in writing.
Founder loans and personal guarantees
Founder loans often sit alongside a personal guarantee on a bank loan or credit line. They are different things: a founder loan is money you have already put in, while a guarantee makes you personally liable if the business cannot repay someone else. Keep track of both, and remember that if the business struggles, your own loan may rank behind the bank. Know where you stand before you sign anything new.
Your founder loan action checklist
- List every transfer you have made from personal to business accounts
- Decide which amounts are loans and which are equity
- Ask your lawyer or accountant for a promissory note template
- Set a rate that meets local rules, such as the AFR in the US
- Record board approval for each loan
- Set up a dedicated liability account and loan register
- Decide how the loan will be treated at your next raise
- Disclose founder loans clearly in your data room
Frequently asked questions
Can I lend money to my company without charging interest?
It is possible, but in the US an interest-free or low-interest loan may trigger imputed interest issues, and in other countries there may be different tax effects. Charging at least the AFR in the US is the common way to keep things simple. Ask your accountant.
Is a founder loan better than putting money in as equity?
It depends on your goals. A loan can be repaid without changing ownership, while equity increases your stake but cannot simply be withdrawn. Many founders use loans for short-term gaps and equity for long-term funding.
Will investors refuse to invest if I have a founder loan?
Usually not. A documented, modest founder loan is common. What worries investors is an undocumented loan, surprise repayments or a large balance that would absorb new money.
What if I already lent money without any paperwork?
You can usually document it now. List the transfers, sign a note that covers them, record board approval and update your books. Do it before your next raise.
Related reading
The bottom line
Lending money to your own company is common and often sensible, but it only works in your favor when it is written down. A signed note, a fair interest rate, clean bookkeeping and an early conversation with investors turn a messy personal transfer into a clear, defensible loan.
Use the start of the year to list your transfers, document them with your accountant or lawyer and set up a simple register. It is an afternoon of work that protects you, your company and your next round.
