The Hidden Risks of Borrowing Money from Your Business
When cash flow gets tight or a personal opportunity arises, it can be tempting for business owners to dip into company funds. After all, it's your business, so shouldn't you be able to access the money when you need it?
While borrowing from your business might seem like a quick fix, it comes with risks that can affect your finances, your business's viability, and even land you in hot water with the Australian Taxation Office (ATO).
Risks of Borrowing from Your Business
Let’s take a look at some of the risks:
1. Cash Flow Disruption
Borrowing from your business can quickly deplete working capital. The money you take out may have been earmarked for payroll, suppliers, tax obligations, or reinvestment in growth. Even a small loan can throw off your cash flow, putting unnecessary pressure on day-to-day operations.
Red flag: If you’re borrowing to cover personal expenses, it may be a sign your salary or dividends aren't aligned with your financial needs.
2. Blurring the Line Between Personal and Business Finances
Unless you’re a sole trader, a business is a separate legal entity. Treating it like your personal bank account weakens that separation. This can lead to:
- Tax complications: ATO scrutiny increases when business owners make undocumented withdrawals. Funds could be classified as income or “deemed dividends,” attracting tax liabilities with penalties.
- Legal risks: In the event of insolvency, personal borrowing from the business could be seen as misappropriation of funds.
Best practice: Use formal loan agreements with interest terms and repayment schedules if you must borrow.
3. Creditor and Investor Confidence
If you’re looking for outside investment, borrowing from the business without transparency can scare off potential investors or lenders. It may suggest weak governance, cash flow issues, or lack of planning.
4. Repayment Pressure
Even if you plan to repay the loan, your future circumstances, like a business downturn or personal hardship, could make that difficult. The burden of replacing those funds may come at a time your business can least afford it.
5. Director’s Loans and Division 7A
If you're operating a company in Australia, borrowing without proper structure can trigger Division 7A tax rules. In short, if you’re a shareholder or director and borrow money from the company, the ATO may treat it as an unfranked dividend. This means you miss out on tax credits in your personal income tax return.
Learn more about directors loans.
Alternatives to Borrowing From Your Business
If you need access to money, there are a few different ways to structure it. These alternatives can keep your business stable, comply with tax laws, and protect your financial future.
1. Increase Your Salary or Director’s Fees
If you’re regularly short of funds personally, your business may not be paying you enough. Increasing your salary or directors’ fees ensures you’re drawing personal income through formal channels. This avoids tax complications and keeps your business books clean.
This is particularly useful for:
- Managing ongoing personal expenses like mortgage payments or school fees
- Maintaining a predictable income stream
Increasing your salary means:
- You’ll need to account for PAYG withholding and superannuation
- The business must be in a strong enough cash flow position to afford the increase sustainably
Tip: Work with your accountant to review your remuneration strategy. If your business has grown or become more profitable, this can be reflected in your personal pay by increasing your salary.
2. Declare a Dividend
If your company has retained profits, you can declare a dividend to shareholders. This is a legitimate way to extract money from your business. It avoids the compliance that comes with loans, and it's usually more tax-efficient than unstructured withdrawals. You’ll pay tax on dividends in your personal income tax return, but franking credits may help reduce the tax payable.
Dividends must be:
- Declared from actual profits
- Properly documented in board minutes
- Paid to shareholders in accordance with shareholding percentages
3. Take Out a Personal Loan
A personal loan may seem less appealing than borrowing from your own company, but it can help keep your business’s cash flow untouched and maintain the financial boundary between you and your company.
Situations where a personal loan may be a better fit:
- Consolidating personal debt
- Covering large medical bills or home renovations
- Making an investment that doesn’t relate to the business
The advantage here is that your business operations remain stable, and your personal liability is limited to your loan terms. A personal loan might also come with a lower interest rate than that of a Div 7A directors loan.
Talk to Us Before You Tap Into Business Funds
Accessing money from your business might seem simple, but the ripple effects can be complex, costly, and long-lasting. What looks like a quick fix today could create compliance issues, tax penalties, or cash flow challenges tomorrow.
The good news? You do have options.
Whether it’s increasing your salary, declaring a dividend, refinancing personally, or restructuring how you access funds, we can help you find the path that protects both your personal goals and your business’s future.
Don’t risk undoing years of hard work with one decision. Reach out to us for tailored advice on the best way to access funds, without compromising your company’s stability or your own peace of mind.
