What Are Circular Business Loans?

Circular business loans are loans made to businesses that are seen as an alternative to traditional business loan funding. A circular business loan is made between 2 entities under the common control or ownership of the same person.

Circular Business Loan Example

An example of a circular loan can be one made between a business owner who is a sole proprietor and that business owner’s personal assets, such as a 401(K) or Individual Retirement Account (IRA). A circular loan can also take place a business and one of its subsidiary companies, both of which are under the same common control.

Required Documentation

A circular loan must be documented in accordance with rules established by the Internal Revenue Service (IRS).  This documentation includes information concerning interest rates and the terms of the agreement between the 2 entities of which the owner is the same. The terms of the loan cannot show any preference toward one party and must be set at the same conditions as loans made between unrelated parties. This prevents any potential abuse of IRS rules, such as those regarding interest deduction that an owner claims on their taxes.