Using Family and Friends for Business Finance
One method of finance that most entrepreneurs consider is sourcing finance from family and friends; whether for repayment or in return for a stake in the business.
Negotiations are obviously different to those with a standard lender, you will still negotiate interest and (if relevant) the share of the business; but the discussions will probably be less complex and provide cheaper terms for yourself.
Taxation
If a loan from family or friends includes interest then the person who lent it to you needs to declare the income received (I.e.: The interest) as taxable income.
You can also deduct any interest paid when calculating your business profit for tax purposes.
If the lender has shares in the business and you make dividend payments to them, these will also need to be declared as taxable income.
Advantages of Finance from Family and Friends
Preferential Terms – Although family and friends are likely to want some interest or a stake in the business in return for their money; they are unlikely to want as much as other investors or lenders, and will be more willing to negotiate. This also means you are likely to get better payment periods.
Risk – Family members and friends will usually need less convincing to take on riskier business ideas. If they trust your judgement they may help fund ideas that other lenders would not. However, be careful that you don’t fund a b ad idea where family and friends have not looked constructively enough at it.
Control – Family and friends who invest by taking a stake in your business are more likely to be silent partners, who are not interested in the day to day operation; although they will probably still be interested in the big decisions!
Security – Unlike banks and other lenders, family and friends will be more likely to offer loans without the need for (or with significantly less) security. This means you do not have to risk your house in order to get finance, though this does not mean you should be any less careful with your business planning!
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