Can You Use A Business Loan To Pay Yourself?

When starting a new business, it can be difficult to know whether to give up your current job and salary or to manage the business alongside your traditional job. On one hand, keeping your job allows you a steady income while getting the business off of the ground. 

On the other hand, working two jobs will prevent you from putting all of your attention into the business, failing to give it the best starting push possible.

While the latter option will undoubtedly be the best option for you and your business, you might not have enough savings to see you through until you start breaking even. 

Can You Use A Business Loan To Pay Yourself

This is where many startup business owners start thinking about what they can use to reimburse themselves for a salary while the company is still getting off of the ground.

Factoring in a salary to your business loan budget could be a smart move to ensure that you’re covered, but are you allowed to use the loan to pay yourself? 

Yes, you can use the business loan to pay yourself if the money is there and not needed for something else. The SBA states that operating expenses cover “your salary as the owner and money to repay your loans.” 

However, this doesn’t mean that you can pay yourself an incredibly generous amount for a salary and get away with it.

Until your loans are paid off, your expenses are viewed by your lender - and they might have something to say about you spending more on your salary than other aspects of the business. 

Where is the money coming from?

Depending on where you’re getting your money from, you’ll need to show how you’re spending your business loan to a certain extent. You might not even be able to offer yourself a salary if your business loan is smaller than you were hoping for. 

To determine whether you’ll be able to pay yourself a salary, there are two main factors to consider - where the funding comes from and how much funding you’re getting.

Different lenders have their own set of requirements for how you use their loans, so you need to be clued up on these expectations before you start planning your salary. 

An  SBA-backed loan from a financial institution will have a larger set of requirements than if you were lending the money from family or friends, but the former will most likely be lending you a considerable amount more than the latter. 

A venture capitalist might be the most strict of all as they can spend more time reviewing your business and giving you advice on how to use your loan.

Many people are able to lend money from multiple sources, which can cause conflicts in the expectations and make your spending very restrictive. To avoid this stressor, you need to be aware of what you can and cannot use your loan for from the very beginning. 

How do you do this? Most lenders require you to create a business plan and cash flow forecast before you even set up your business. These will show how much you’re expecting to spend before you break even, and in how many years you expect to be able to do this. 

You will need to show your operational expenses, which can include the salaries of you and your employees. Depending on how much you’re expecting to pay for the other aspects of your business, some lenders will want you to work without a salary until you start to break even. 

Of course, it can take years for a business to become profitable. So, a lender who is not willing to pay your salary during this time is not ideal. Luckily, most lenders will now allow for at least some kind of salary to be paid to you during this time. 

Most lenders will allow you to build yourself a salary into the business plan. With that being said, it’s important to remember that your lender has the ability to adjust where their money is going as time goes on. 

If they’re not happy with how the business is performing, they might choose to take a portion of their capital from your salary and put it towards the marketing budget. Although venture capitalists are most likely to do this, don’t let this write them off just yet. 

Should you stay away from venture capitalists?

No, you shouldn’t immediately turn away from venture capitalists' help. While they are more involved in your business than a financial institution might be, this isn’t necessarily a bad thing.

While someone telling you how to run your business can be somewhat infuriating, venture capitalists do know a lot about business and want to see the company become as successful as possible. 

Many venture capitalists consider the biggest mistake for startup businesses is when the owner budgets for their salary to be much too large. When given the opportunity to determine what you can pay yourself, many people think that they can choose a number in the six figures. 

However, paying yourself so much and taking money from other areas of the business is a quick way to ensure that any lender will take one look at your proposition and turn you away.

No lender will want to put up the money for your business if you’re going to be taking such a large chunk of it and lining your own pockets with it. 

Instead, it might be wise to figure out how much is the least amount of money you can survive on in a month and be prepared to only pay yourself this much.

Not only will you have more money to spend on giving your business the best chance possible, but your application will also look more appealing to lenders. 

What other areas will you need to spend your loan on?

A business loan will be used for almost everything to get your company up and running. Whether it’s a  restaurant, store, or barbershop, you’ll need to consider every possible monetary decision before spending your loan. 

Below we’ll be listing a few of the most important things that your business loan will need to cover. Once you have budgeted for these, you can then begin to think about your salary and how large it can be. 

1. Initial stock and replenishments

Your business is not going to get very far if you cannot pay for your stock to sell to others and make a profit. This is one of the first things that you should budget for, as it will be the driving force behind your business.

Make sure to account for all the stock you’ll need until you can break even and begin replenishing stock with the profits. 

2. Marketing and advertising

If no one knows about your business, how are you going to get any customers? Marketing is an essential part of business and therefore requires an impressive budget behind it.

If you’re skimping on the marketing budget, your business is not going to reach the majority of your target audience. 

3. Employee salaries

This one might hurt just a little bit - you need to take into consideration your staff’s salaries before you can set your own.

As employees will be running the daily operations and keeping the business going while you’re busy behind the scenes, they need to be kept happy with their salaries. If you don’t have enough money to pay their wages, you’ll soon be left to do all of the work yourself. 

4. Accommodation and equipment

Unless your business is e-commerce only, you’ll need to factor in the cost of the premises. You might have to factor in monthly rental or mortgage repayments. Equipment is another important factor that you shouldn’t overlook. 

If you’re opting for the cheapest equipment possible to enhance your salary, you might find it breaking down or leaving you with subpar results.

When budgeting your loan, you should account for the best equipment possible, as well as contingency budgets should this equipment fail and need repairing or replacing. 

Overall

To answer your original question, yes you can use a business loan to pay yourself. However, lenders will want to see that your salary is one of your lowest priorities.

Only after you have budgeted for everything else in a business should you look to see if you can pay yourself a minimal salary. The less you pay yourself in the short run, the quicker you can begin making a profit and earn the big time.