How to Borrow Money from Friends and Family
Budding entrepreneurs often turn to a lender that overlooks weak points, provides flexible terms, and negotiates a dream-come-true interest rate: the Bank of Mom or Dad.
Friends will support you and your idea!
With zero established track record, start-ups often have trouble getting a traditional bank loan or funding from venture or angel investors. So after tapping their savings, founders often go to informal investors, which usually means extended family and friends. Such arrangements combine best wishes, a pay-me-when-you-can attitude, and few expectations of a meaningful return. That may possibly turn out to be the most realistic view of family and friends financing.
So often times, it might be wise to not formalize the loan since doing this can raise expectations that it will be repaid in full.A lot of us will go for a loosely structured deal in which, for example, repayment may start only when a company has reasonable cash flow that could afford to make payments — a position many businesses don’t reach until three to five years afterward, if at all. Such an arrangement doesn’t raise expectations of prompt repayment. But such vagueness can lead to problems and confusion later on, prompting some experts to urge putting into writing whether funds are a borrowing arrangement, a birthday present or an investment. Still, terms of the agreement need close attention. Failure to collect interest or a repayment might prompt the Internal Revenue Service to determine the “loan” was actually a gift and impose gift tax and other penalties.
- Your Family Believes Your A Genius!
Online services, such as Prosper Inc. and Virgin Money, a unit of Virgin Group PLC, offer to structure arrangements between borrowers and individual lenders, which are often relatives or friends. For smaller loans, Virgin Money, for instance, provides documentation plus a payment schedule. For larger business loans, it should service the loans, send payment reminders as well as provide year-end reports. A more formal plan for larger loans services the financing — including setting up electronic fund transfers, sending email reminders and providing online account access. It also sends out year-end reports to the borrower and lender. The loans are flexible, usually offering lengthy grace periods and interest rates and payment schedules favorable to the business owner. Some planners note that family members can supply money as an annual gift, helping reduce the size of an estate subject to taxes. Gifts also ease worries of conventional lenders who likely will be concerned that family loans could impair their ability to collect. Just one more thought: Some family members who provide loans or gifts consider the funds come attached with the right to share or participate in your small business. Documentation can spell out such issues.
by .: themikkigreene
