The Small Business Specialists
Phone: 13 12 49
Raising finance from family and friends can be rewarding for both parties.
Family and friends may accept more flexible terms and conditions that are better suited to your business than those offered by commercial banks.
Often arrangements with family and friends are informal and based purely on trust and verbal assurances. However, a formal written agreement is strongly advised in order to minimise disputes in the future. Preserving your relationships with friends and family is as important as pursuing your business opportunity.
Be aware of the tax implications of interest on loans from family or friends. The lender has to declare the interest received as taxable income, and you can deduct the interest as a legitimate business expense. If the loan has no interest then there are no tax implications for either party.
Follow these key steps when borrowing from family and friends:
Practice a one-line pitch that clearly communicates the vision for your business. Tell them why the business idea will work, and what you will do to make it work. Tell them your back-up plan to pay them back if the business doesn't work.
Make it clear that the money you are asking for is a loan and that you will pay it back. It is not an equity investment. Family and friends are entitled to get back what they loaned you, with interest, and a performance bonus if you achieve a specified level of financial success. However, a loan does not mean they have bought equity in your business.
Prepare a realistic repayment plan that is based on the financial forecasts developed for your business plan. Document the plan and include a reasonable and easy-to-understand interest rate.
Once you have agreed on a repayment plan, you should draft a formal loan agreement to protect both parties. A formal agreement, or contract, ensures that everyone understands this is a business arrangement.
Your agreement should include, but not necessarily be limited to, the following issues:
It is strongly that recommended you seek professional advice before entering into any contract.