How to Handle Business Expenses When Your New Business Has No Revenue
Starting a new business often means you won’t have immediate revenue or a reliable source of income until you begin to attract clients and gain traction. In such situations, you might wonder how to cover your business expenses. There are several ways to do this, and some are more advisable than others.
One method we don’t recommend involves transferring money to the company as a "business loan" and then paying it back later. This approach is not supported by Companio, and for good reason.
Imagine you start your business in May and begin transferring money from your personal account to your business account as a loan. By the end of the year, if the business hasn’t grown and customers haven’t come, you’ll face a new challenge when it’s time to submit the annual report. Your company will appear to be in debt, as it owes significant liabilities to you, the lender, but has no revenue to repay these debts. This situation could potentially lead to bankruptcy. To resolve this, you might need to inject capital into the company (as share capital) or waive the loan, which means giving up any chance of recovering that money. Therefore, we strongly discourage this approach (and indeed, we do not support it in Companio).
The best method, and the one we recommend at Companio, is to handle these expenses as "out of pocket expenses". This means you pay for the expenses with your personal funds and then mark them as "Out of pocket" expenses. This approach ensures your personal funds are used efficiently without complicating your business’s financial records.
If you have a clear idea of what your expenses will be until you start generating revenue, another good option is to increase the share capital by that amount and pay for it. This approach has two advantages: it provides your company with the necessary liquidity, and an increased share capital is always seen as a sign of financial strength for a business.
By following these recommended methods, you can ensure your business remains financially healthy and compliant with regulations.
Methods We Don't Recommend (or Support)
One method we don’t recommend involves transferring money to the company as a "business loan" and then paying it back later. This approach is not supported by Companio, and for good reason.
Imagine you start your business in May and begin transferring money from your personal account to your business account as a loan. By the end of the year, if the business hasn’t grown and customers haven’t come, you’ll face a new challenge when it’s time to submit the annual report. Your company will appear to be in debt, as it owes significant liabilities to you, the lender, but has no revenue to repay these debts. This situation could potentially lead to bankruptcy. To resolve this, you might need to inject capital into the company (as share capital) or waive the loan, which means giving up any chance of recovering that money. Therefore, we strongly discourage this approach (and indeed, we do not support it in Companio).
Methods We Recommend (and Support)
The best method, and the one we recommend at Companio, is to handle these expenses as "out of pocket expenses". This means you pay for the expenses with your personal funds and then mark them as "Out of pocket" expenses. This approach ensures your personal funds are used efficiently without complicating your business’s financial records.
If you have a clear idea of what your expenses will be until you start generating revenue, another good option is to increase the share capital by that amount and pay for it. This approach has two advantages: it provides your company with the necessary liquidity, and an increased share capital is always seen as a sign of financial strength for a business.
By following these recommended methods, you can ensure your business remains financially healthy and compliant with regulations.
Updated on: 28/05/2024
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