Can my business loan money to another business—this question has gained attention as companies look for smarter ways to manage extra cash. Whether it’s a strategic partnership, helping a struggling vendor, or diversifying income streams, lending money from one business to another is absolutely possible—but not without rules.
In this blog, we’ll explore the legal, financial, and practical angles of this decision. You’ll learn when it’s allowed, what documents are needed, and how it impacts taxes and liability. Whether you’re an LLC, partnership, or corporation, this guide is built to inform and protect your interests.
Can My Business Loan Money to Another Business: Legal Basics
Lending money from one business to another is legal, but certain criteria must be met. The business must:
- Have clear authority under its operating agreement or corporate bylaws
- Avoid violating usury laws (state-specific)
- Ensure proper documentation is in place
Key Documents to Prepare:
- Loan Agreement
- Promissory Note
- Payment Schedule
- Interest Terms
- Default Provisions
Failing to set this up properly can make the loan unenforceable in court.
When Is It a Smart Move to Loan Business Funds?
There are a few strategic reasons why a business might lend funds to another business:
| Situation | Reason to Lend |
|---|---|
| Support a Vendor | Maintain supply chain continuity |
| Invest in Startups | Earn higher interest compared to banks |
| Partner Expansion | Support joint ventures or collaboration |
| Excess Cash | Better ROI than letting cash sit idle |
Always consult your CPA or financial advisor before committing to a loan of this type.
Risks Involved in Business-to-Business Lending
Before lending, be aware of these risks:
- Default Risk – The borrower may not repay.
- Cash Flow Issues – Tied-up capital may hurt your liquidity.
- Legal Trouble – Poor documentation can cause litigation.
- Tax Complications – Misclassification may cause IRS penalties.
To minimize risk, do proper due diligence just like a bank would.
Can My Business Loan Money to Another Business Without Interest?
Technically, yes—but it’s not always advised. Interest-free loans can:
- Raise red flags with the IRS (may be treated as a gift)
- Miss out on potential returns
- Lead to informal, non-binding agreements
Pro Tip: Always charge a reasonable interest rate and log it for tax purposes.
Tax Implications You Should Know
Loaning money between businesses can trigger tax issues if not structured correctly. Here’s how to stay compliant:
Tax Tips for Business Lending:
- Report interest income on your tax return
- Avoid calling it a “loan” if there’s no repayment plan
- If the loan is forgiven, it may count as taxable income to the borrower
- Keep proper records to avoid audits
Failing to classify the transaction properly can turn your loan into an equity investment—or worse, a gift.
Can My Business Loan Money to Another Business If We’re Both LLCs?
Absolutely. Loaning between LLCs is a common practice, especially for owners who operate multiple entities. But both entities must:
- Have separate bank accounts
- Maintain proper documentation
- Be in good standing with the state
You should also confirm that your LLC’s operating agreement allows lending to external parties.
Checklist Before You Lend
Here’s a quick checklist to help you decide if lending money makes sense:
✅ Do I have extra cash not needed for operations?
✅ Have I assessed the borrowing business’s creditworthiness?
✅ Is there a written loan agreement?
✅ Do I understand the tax implications?
✅ Am I charging reasonable interest?
✅ Did I consult with my accountant or lawyer?
If you can’t check all these boxes, it might be best to hold off.
Alternatives to Lending Money
If you’re not sure about issuing a loan, consider these alternatives:
- Equity Investment – Gain partial ownership instead
- Joint Ventures – Pool resources for a shared goal
- Invoice Factoring – Sell unpaid invoices for cash
- Bridge Financing via Banks – Let third-party lenders take the risk
These options may offer better legal and financial protection.
Loan Agreements: What Must Be Included
Without a solid agreement, your money may never come back. Here’s what to include:
| Section | Purpose |
|---|---|
| Loan Amount | Clearly define how much is borrowed |
| Interest Rate | Set fair and legal rate to avoid disputes |
| Repayment Terms | Timeline, monthly payments, balloon payments |
| Default Clause | What happens if the borrower fails to pay |
| Signatures | Must be signed by authorized parties |
Avoid handshake deals—even with friends or partners.
Can My Business Loan Money to Another Business That Is Struggling?
Yes—but it’s risky. You need to determine:
- Is the business viable long-term?
- Will your loan only delay the inevitable?
- Are there assets to secure the loan?
Sometimes, helping a struggling partner can backfire. Ensure there’s collateral or a personal guarantee to safeguard your funds.
Can My Business Loan Money to Another Business Owned by Me?
This is common among entrepreneurs running multiple ventures. However:
- You must keep accounting clear for each entity
- Transactions must be at arm’s length
- Avoid self-dealing, which may breach fiduciary duties
Example: If Company A loans $100,000 to Company B, both owned by you, treat it like any third-party loan. Document everything and disclose it to stakeholders.
How to Report the Loan in Financial Statements
For the lending business, it appears as:
- Asset: “Loan Receivable” under current or long-term assets
- Interest Income: When payments start arriving
For the borrowing business, it’s:
- Liability: “Loan Payable”
- Interest Expense: Deductible when paid
Make sure both sets of books reflect the transaction identically.
Real-Life Example: Small Business Lending Gone Right
A small IT firm lent $25,000 to a design agency it often collaborates with. The loan:
- Was properly documented with a promissory note
- Had a 7% annual interest rate
- Was paid back within 18 months
Not only did the IT firm earn $2,625 in interest, but the partnership also grew stronger, bringing more collaborative projects.
This example shows that with good planning, B2B loans can benefit both sides.
Red Flags to Avoid
- Verbal agreements
- No repayment terms
- Loans to businesses with repeated losses
- Loans to businesses owned by friends without vetting
If something feels off, trust your gut—and your legal counsel.
Final Thoughts on Lending Business Funds
So, can my business loan money to another business? Yes, but don’t rush into it. Understand the risks, use proper legal documents, and follow tax rules. This isn’t just about money—it’s about strategy, trust, and long-term planning.
Done right, it can be a smart move. Done wrong, it could be a legal and financial nightmare.
Frequently Asked Questions
Can a business borrow money from another business?
Yes, as long as proper agreements and tax reporting are followed.
Can I loan money from one LLC to another?
Yes, if both LLCs are legally distinct and documentation is clear.
Can a business give money to another business?
Yes, through loans or investments, not as gifts.
Is it legal to borrow money from your own company?
Yes, but IRS and legal rules apply, especially for closely held corporations.
Let’s Wrap It Up…
Can my business loan money to another business is not just a yes-or-no question—it’s a path that requires strategy, compliance, and smart financial planning. From legal paperwork to tax impact, every detail matters.
SHARE YOUR THOUGHTS ON THE BUSINESS LENDING EXPERIENCE IN THE COMMENTS BELOW.