What Are Partner Loans?

A partner loan is where two or more individuals collaborate to secure and repay a loan together. Often used by business partners or couples, these loans allow borrowers to pool their financial resources and share repayment responsibilities. Partner loans may be a helpful option for those seeking joint financial solutions with shared accountability.

With partnership loans, it’s important to put into writing what may happen if the partnership is unable to repay the loan. If not, internal conflicts and legal disputes may occur. 

Keep reading to learn the basics of partner loans, how they work, and when they might be a good option.

Partner Loans to a Partnership 

Partner loans to partnerships are common in the business world. Slightly different from a partner loan, where both people apply for and receive the loan, a partner loan to a partnership is when an individual partner lends money to the partnership. The loan is typically formalized with a promissory note outlining repayment terms, interest, and conditions. It’s treated as a liability on the partnership’s balance sheet, and repayment is prioritized over partner distributions.

Common reasons a partner may give a partner loan to a partnership include:

• Paying vendors

• Expanding the business

• Purchasing commercial real estate

• Buying equipment

• Paying employee wages

• Restocking inventory

Partnerships and Capital 

A partnership is an arrangement between two or more people to operate and manage a business. In a general partnership, partners share profits and liabilities. 

Partnerships typically do not pay income tax. Instead, taxes are passed on to each of the individual partners to file on their own returns. 

When a partner loans funds to the business, the business may have extra capital from the loan, but the money isn’t taxed as income. That’s because it has been transferred from one of the partner’s accounts to the shared business account. Since the business hasn’t earned the money, the money is not treated as income. 

The same is true when the loan is repaid. It isn’t income or earnings because it represents repayment of borrowed funds rather than revenue.

Recommended: How to Choose a Business Structure

Tracking Partnership Capital 

While a partner loan is not taxed, it is typically documented and tracked carefully. Otherwise, it could become a source of conflict. 

To prevent problems or disputes, partnerships may draft written loan agreements or promissory notes spelling out the loan terms and details. 

Partner Personal Loans 

When one partner gives money to a partnership, this might result in that person receiving more ownership of the company through equity. However, if the other partners do not want to relinquish their equity, the money may be considered a debt.

A partner may infuse needed capital into a partnership with a personal loan instead of using their savings. In this case, the partner is fully responsible for the monthly loan payments even if the business isn’t earning money. This is why the loaning partner may have a written loan agreement with the other partners to spell out a payment plan. 

Partner Loan Details 

The terms and conditions of the partner loan may consider all possible scenarios to help prevent conflict and legal disputes. Such scenarios might include:

Dissolution of Partnership Loans 

If, for example, the partnership dissolves and goes out of business, what happens to the loan repayments if the money came via a loan from a private lender? In this case, are the other partners responsible for paying it back, as well? This is something you may specify in the loan agreement.

If the money came from a partner’s personal savings, would that partner simply write it off as a loss on their personal tax return, or could they expect the other partners to pay them back? Again, you’ll want to cover scenarios such as this in the loan agreement.

Because the legal wording may be complicated, it may be worth seeking the help of a lawyer when drafting the loan agreement. 

Buyout Price

Another thing to consider is what would happen to the debt if the company or one of the partners is offered a buyout. Would the lending partner receive a greater share of the buyout price? Would nonlending partners receive less?

All contingencies like this may be clearly outlined in the loan agreement.

Alternative Loan Options 

A partner loan to a partnership doesn’t have to come from a partner’s personal savings. There are alternatives to consider, such as:

Personal Loans 

With a personal loan, a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. Once you’re approved for a personal loan, you may expect to receive funds quickly, typically within one to five days. 

While there are pros and cons of personal loans, one benefit is that many personal loans may be used for business expenses. If you’re thinking about a personal loan, just make sure the lender you’re working with provides personal loans for business. 

You may want to work on identifying personal loans that fit your needs. Decide on the amount of money you want to borrow and whether you want to use personal collateral to secure the loan. You may explore personal loan rates to help choose a loan suitable for your situation.

Joint Loans 

With joint personal loans, two parties take out the loan. These loans may come with higher loan amounts than some other loans because a lender looks at the assets, credit scores, and incomes of two people when deciding eligibility. Joint personal loans may provide better terms and conditions and might be easier to qualify for.

Some lenders provide joint personal loans mainly to members of the same household. Others may be more flexible. Just know that with a joint personal loan, both parties may share the financial responsibility for repaying the loan.

Personal Loan With a Cosigner

If you have a subprime credit score, a personal loan with a cosigner may be an option to consider in order to get a lower interest rate and possibly a larger loan amount. 

With a cosigned loan, the cosigner is only expected to make payments if the primary borrower is unable to do so. In that case, the cosigner becomes responsible for the loan.

Small Business Loan

A small business loan may suit your partnership needs. The maximum amount you may borrow with a personal loan is usually about $50,000, but with an SBA (Small Business Administration) loan, for instance, the maximum is $5 million. 

Small business loans may typically be tailored to your needs. In addition to SBA loans, there are business lines of credit, equipment loans, and working capital loans, among others. You’ll want to do some research to explore all the available options.

Keep in mind that even though small business loans may be taken out in the business’s name, you might have to sign a personal guarantee, making you personally responsible for the debt in case your business can’t repay the loan. That means your personal assets could be at risk. 

The Takeaway

A partner loan to a partnership is a loan given by a partner to their business partnership. Infusing capital could be a way to expand a business or help with temporary cash flow issues.

If you’re considering taking out a personal loan to use as a partner loan, Lantern by SoFi can help. Just provide some basic information about yourself and the loan you need, and Lantern can guide you through the process.