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What Are Partner Loans?

What Are Partner Loans?
Lauren Ward
Lauren WardUpdated January 3, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When one business partner lends money to a partnership, that’s called a partner loan. The money can be used for any business-related purpose, such as restocking inventory.If a partner provides a loan to their partnership, it’s important to put into writing what will happen if the partnership is unable to repay the loan. If not, internal conflicts and legal disputes may occur. Here’s what you need to know about partner loans.

Partner Loans to a Partnership 

Partner loans to partnerships are common in the business world. These loans are typically used to infuse money into the partnership. 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 to each of the individual partners to file on their own returns. When a partner loans funds to the business, the business will 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 subject to tax. The same is true when the loan is repaid. It isn’t income or earnings so it isn’t taxable.Recommended: How to Choose a Business Structure

Tracking Partnership Capital 

While a partner loan is not taxed, it should be carefully documented and tracked. Otherwise it could become a source of conflict. To prevent problems or a dispute, partnerships can 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 can 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 should 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 should consider all possible scenarios to help prevent conflict and legal disputes.  Such scenarios might include:

Dissolution of Partnership Loans 

Think about this: If the partnership dissolves and goes out of business, what will happen to the loan repayments if the money came via a loan from a private lender? (And if you’re wondering, what is a private lender, they are individual or nonbank investors that offer loans). In this case, will the other partners be responsible for paying it back as well? This is something you can specify in the loan agreement.If the money came from a partner’s personal savings, will that partner simply write it off as a loss on their personal tax return or will 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 can 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 will happen to the debt if the company or one of the partners is offered a buyout. Will the lending partner receive a greater share of the buyout price?  Will non-lending partners receive less?  All contingencies like this should be clearly outlined in the loan agreement. 

Alternative Loan Options 

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

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 can be used for business expenses. If you’re thinking about a personal loan, just make sure the lender you’re working with offers personal loans for business. You’ll want to work on finding 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 can explore personal loan rates to help find the best loan 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. This is because a lender looks at the assets, credit scores, and incomes of two people when deciding eligibility. Joint personal loans may offer better terms and conditions and might be easier to qualify for.Some lenders offer 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 will share the financial responsibility for repaying the loan.

Personal Loan With a Co-signer

If you have a subprime credit score, a personal loan with a co-signer 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 can 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 can typically be tailored to your needs. Not every business loan is the same. For example, in addition to SBA loans, there are business lines of credit, equipment loans, and working capital loans, among others. Do your research and 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 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. 

Frequently Asked Questions

Can a partner make a loan to a partnership?
What happens when a partner issues a loan to the partnership?
What are alternatives to partner loans?
Photo credit: iStock/gece33

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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