Financial Answer Center

Have you always dreamed of opening your own business but never had the money to do it? Businesses are typically financed from a variety of different sources. These sources can consist of a combination of the following:

• borrowed money
• contributions from owners
• the sale of an existing business

If you need to borrow, there is a benefit when borrowing money for business reasons: The interest is tax-deductible.

Businesses usually have an option to borrow at either fixed or variable rates of interest. They also may be able to get lines of credit and borrow money when it is needed.

Whenever you borrow money, whether to start a business or to purchase new equipment for it, you will have to provide collateral for the loan or prove to the lender that the business will be profitable enough so that you can repay the money. You may be able to better negotiate with a banker with whom you already have a relationship. If the banker is aware of your excellent credit history, and you have money deposited at his or her institution, things may move more smoothly.

It is a common practice for a lender to request financial information about you and/or your business. Be prepared to provide current financial statements and income tax returns. You may also need to have personal financial statements prepared, if you are just starting a business. Ask your lender for details. Most lenders will want to see a "business plan"; setting forth in specific detail how you expect to do business and make a profit.

Is the Interest Tax-Deductible?

If you are obtaining a loan to be used in your business, the interest is tax-deductible. If you are obtaining a mortgage to buy business property—real estate to be used in your business—the interest on the loan is also tax-deductible, but the points are not fully deductible in the year of the purchase. Instead, they must be amortized, or deducted in equal amounts each year, over the term of the loan. This includes property on which you receive rental income.