A viewer asked a question that comes up more often than people expect: how should I factor in loans from owners, and what do I do with the repayment?

It sounds like a minor detail. It is not. Owner loans show up in small business lending regularly, they are often informal, and they create cash flow dynamics that matter to your underwriting if you know how to read them. Senior Credit Trainer Joe Davis and I worked through both sides of the question in a recent livestream. Here is what we covered.

First, Find the Loan

Owner loans from an individual to their company will show up on Schedule L, the balance sheet, of the 1120S or the 1065. That is your first place to look.

The catch is that smaller entities are not required to file a Schedule L. If the return does not include one, you will not find it there, and that is genuinely inconvenient because even small entities can have meaningful owner debt on the books.

When the balance sheet is not available or does not give you enough detail, ask for a debt schedule. It is not a standard tax return attachment, it is usually a simple Excel document, but it should show the entity's full debt picture including any amounts owed to the owner. You will have to ask for it specifically.

If the owner is also a guarantor, the personal financial statement is another place to look. A loan to the company should show up there as an asset. And if the company is already making payments on that debt, the interest portion will appear on Schedule B of the owner's 1040.

One note on personal financial statements: they are usually filled out by the owner, not a CPA, and they reflect the owner's best understanding of their own finances. In practice that means they are often incomplete. You might see company assets listed without the corresponding debt, or the reverse. Treat them as one data point, not the whole picture. Cross-reference against your own files, the credit bureau report, and whatever debt schedule you can get, and then ask questions to fill the gaps.

What to Do With It

Once you have found the loan, the question is what it means for your analysis. A few things are worth working through.

Ownership percentage and control

If the owner has full or majority control of the entity, they control the checkbook. They decide when the company pays them back. That makes the loan more flexible than third-party debt, but it also means repayment can accelerate or stop at any time based on the owner's preference rather than a fixed schedule.

A minority owner who has loaned money to the company has less flexibility, especially if there is not a formal promissory note. They do not control the timing of repayment, which changes the risk profile on both sides.

Repayment history

Is the company paying the owner back consistently? Is it principal and interest, or just interest? Look at this across multiple years if you can. Consistent repayment is a signal worth noting. No repayment is not necessarily a problem, but it is context you want to understand.

If the loan is on the balance sheet, ask for a copy of the note. Knowing the terms tells you whether repayment is near, ongoing, or undefined. If the loan is close to being paid off, that eliminates a cash outflow from the company, but it may also lead the owner to redirect that cash as distributions. Know what is coming.

What the loan tells you about the business

An owner putting money into the company as a loan rather than equity is a signal worth reading. It could mean the business is growing and needs a liquidity bridge. It could mean the business hit a rough patch and the owner stepped in to support it. It could be a CPA's recommendation for tax purposes. Understanding which one applies matters for how you think about future cash flow.

During COVID, plenty of solid businesses had owners loan them operating funds to get through a difficult period. Those loans were a sign of commitment and available personal resources, not distress. But loans that appear every year without clear purpose, or that show up alongside declining revenue, deserve more scrutiny.

Subordination and repayment priority

If you are extending credit to the business, you want to understand where your repayment sits relative to the owner's. In many cases, lenders will require the owner loan to be subordinated, meaning the bank gets paid first. The SBA takes this position explicitly. Even outside SBA lending, it is a reasonable thing to address in your underwriting. If the company is paying down owner debt at the same time it is servicing your loan, that is a real cash outflow that belongs in your debt service calculation.

Why It Matters Even With a Personal Guarantee

One point worth underscoring: a personal guarantee is valuable, but exercising it is expensive and uncertain. You would much rather have a business that can service its own debt than one that requires you to pursue a guarantor to recover. Understanding how money is flowing between the owner and the entity, in both directions, is part of understanding whether the business can actually stand on its own.

Small business owners often do not draw a clear line between their personal finances and their company's finances. That is understandable. But as the lender, that distinction is fundamental to your analysis. Owner loans, repayments, and distributions are all part of the same picture.

The Bottom Line

Owner loans are not unusual, and they are not inherently a concern. But they require some investigative work to find, and once you find them, they deserve more than a quick note in the file.

Ask where the money came from, why it went in, whether it is being repaid, and what happens when it is. The answers will tell you something real about the financial relationship between the owner and the business, and that relationship is part of what you are underwriting.