How to lend money to your business the right way
October 4, 2026
By Nadia Cabrera-Mazzeo, Esq.
People put thousands of their personal money into their business and assume that the business will pay them back on top of profits or other forms of business income. Maybe that is what happens. The IRS may never look closely. But a loan without loan documents is precarious. This is especially true for loans made to nonprofits—make sure it’s properly documented!
What are loan documents?
Loan documents are, at least, a loan agreement and a promissory note. These are legally binding contracts between you and your business in which the business promises to pay you back, with interest. You can make the terms of the loan favorable to the business—it doesn’t have to be a shakedown when you want to collect. But it does need to be legally documented. When it is said that an investment is “structured as a loan,” it means there are loan documents and the loan was properly recorded in the company’s books.
Other loan documents might be necessary in addition to the agreement and promissory note, like when an asset is being used as collateral for a loan or if the loan is being guaranteed by a third party.
What happens if there are no loan documents?
Lending your business money without proper documents has a few consequences:
1
Your business has no legal duty to pay you back.
This might not sound like a big deal, especially if your business isn’t making much money. But if your business is making money, or will, and has other documented creditors, your loan may not even be on the map in terms of priority to be repaid. Indeed, if it gets to the point of bankruptcy, there is little chance you would get those funds back even if you considered yourself a creditor of the business.
It’s especially risky to lend money to your business without loan documents when there are other owners involved. If you do not have full control of the company, your repayment might be at the mercy of the other people involved.
2 You might have to pay income tax on the repayment.
When you get repaid for a loan, that’;s not usually considered taxable income (because it is a debt to be repaid, not earnings). But if the IRS looks closely at your “loan”; and finds no legal documentation, it might make the loan go poof (reclassify the loan) and make you pay income tax on the repayment. This can be a major consequence for high-dollar loans that were not properly structured and documented.
3 Your business cannot legally deduct the loan payments as business expenses.
Loan payments to creditors are tax-deductible business expenses. But again, if the IRS looks closely and there is no loan documentation, it may reclassify the loan and the payments by your business will no longer be tax deductible.
This goes for any time you lend money to anyone, not just your/ a business. If you want the other person to have a legal duty to pay you back or if you want to ensure you are paid back if that person sells a major asset or goes bankrupt, you need loan documents. Our attorney can help draft loan documents for businesses and individuals in New Mexico. Schedule a consultation to discuss the details.
Honest Contracts can help you with loan documents.
Schedule a consultation to get started.
Law office of Nadia Cabrera-Mazzeo, Esq.
Small business and contracts lawyer
Based in Albuquerque, serving clients throughout New Mexico
505 427 2025
nadia@honestcontracts.com
PO Box 6825, Albuquerque, NM 87197
The information on this website is not legal advice and does not create an attorney-client relationship. The rates and fees listed on this website may not be the most up to date.