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Formalizing Loans From Relatives, Friends

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                   SoHo NEWS & TIPS
Helping You Make the Most of Your Small Office/Home Office
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Comment The Post Below...

Greetings,

It's nice to have family and friends to help you with loans 
if you are starting up your own business. However, you must 
remember that just because you have a personal relationship 
with the person you are borrowing from doesn't mean you 
should slack on paying them back! Borrowing from relatives 
can have many advantages, but it can put your personal 
relationships at risk if you aren't careful. 

Best,
Mandi

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Formalizing Loans From Relatives, Friends 
By MARSHALL LOEB From Marketwatch 

Are you searching for money to start a new 
business? The first place entrepreneurs commonly 
look is their own savings or credit cards. The 
second place is family and friends. 

Such private loans and investments from relatives 
and acquaintances are often an integral part of 
raising start-up capital, when a business is too 
small or unproven to qualify for commercial lend-
ing. 

Entrepreneurs generally provide two-thirds of 
their own start-up capital. Private loans and 
investments make up the bulk of the rest, accord-
ing to the Global Entrepreneurship Monitor, a 
consortium of universities. 

The advantages are lower interest rates than at a 
bank (or none at all), flexible repayment and a 
certain amount of forgiveness if your start-up 
sinks. 

But borrowing from relatives, or allowing them to 
invest in your new business, can put your personal 
relationships at risk, and the cozy nature of such 
loans can lead business owners to be lackadaisical 
about repaying the money. 

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The default rate for such friends-and-family loans 
is 14%, says Asheesh Advani, owner of CircleLending, 
which manages private loans; he is also author of 
"Investors in Your Backyard" from the Nolo do-it-
yourself book series. 

If there's one piece of advice to heed above all 
others, it is to put your financial arrangement in 
writing. Write a formal business plan, make out a 
promissory note and draw up a formal repayment 
schedule and stick to it. Such documentation cuts 
the default rate on private loans in half and 
makes it easier for both parties to claim their 
tax benefits, Advani advises. 

Loans are far more popular than equity investments 
because they are cheaper and don't tempt an uncle 
or aunt to try to run your business. Advani says 
entrepreneurs pay an average 6% on loans from 
relatives. 

Be honest with your lenders about what they're 
getting into. Most relatives will invest in your 
start-up for more than just altruism; they want to 
see you succeed, but they also want to make some 
money, too. 

For information from the Small Business Administ-
ration on financing a start-up, writing a business 
plan and other guidance, go to www.sba.gov.

DID YOU KNOW?

Time your date of incorporation so that it includes the bulk 
of the tax year, or you could end up filing a tax return for 
a corporation that was only in operation for a few days 
within the tax year.

So what did you think about this issue? Drop me a line and let 
me know at mailto:mandi@gophercentral.com 

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