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Formalizing Loans From Relatives, Friends | |
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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.
Continued below....
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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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