Considerations when borrowing money for your business from friends or family
Some business owners use a combination of personal savings and borrowing from friends and family at the initial stages of the business. It's important to think about and discuss the concept of gift versus loan before accepting any money from family or friends for your business.
Determine if the money is a gift or a loan
If a close friend or family member is willing to provide you with a contribution towards your business, the temptation may be to take the funds right away. Before you do, take a moment and clarify if the funds are to be received as a gift or a loan.
A gift for your business from friends or family
A gift for your business should be very clearly identified as a contribution with no expectation of repayment. There still may be tax liability on a gift, and with a large gift you should legally document the contribution which may have additional legal expenses. Talk with your lawyer or accountant to make the right choice for your situation.
A business loan from friends or family
Like a bank loan, this loan will have a principal amount (the amount you borrow) and also could have an interest rate, fees and even a set payback period or term (how long you have to repay the loan plus any interest and fees). Business owners will often ask for a loan from people they know because it can offer very flexible repayment terms and schedule, and these should be documented in a legal agreement for the protection of all parties.
Set decision making expectations with whoever provides you a loan
Family or friends who provide you a loan or cash gift may feel that they are now part of your business and have the right to make or influence business decisions. Before you accept that loan or gift, make sure you fully discuss any future involvement in your business—not agreeing on those expectations up front may lead to relationship issues later.
