Friends and Family Investing in You
Raising finance for any business can be difficult, for a new business it can be even more difficult. Applying for business loans is complex and often leads to disappointment. Business overdrafts are almost impossible to secure without a trading history. Grants and bursaries are few and far between. Remortgaging the family home is risky and best avoided. Where then, do you go for finance?
Family and friends can often be the solution to raising essential start-up finance. However, this too can be minefield. It is common for members of your family or friends to need their money back quickly if they experience family problems or unforeseen circumstances. There is also the risk that your business venture fails; you will still need to pay the lender back their initial investment.
There are several ways that family and friends can invest in your company. All of which should be dealt with professionally, preferably with the aid of a solicitor so that everyone knows where they stand. It is essential that proper safeguards are put in place to protect both parties.
Loans with InterestThis is the method most likely to be chosen by friends rather than family. When agreeing the loan an interest rate agreeable to both parties should be worked out. If you are not sure what rate to suggest you can find out what the current rate for a bank loan is and then reduce it by around 2%. This will work out cheaper for you while still offering a return on the investment for the lender. You should also agree a timescale for the loan and then work out the monthly repayments.
Interest Free LoansThese loans are most likely to be offered by your immediate family as there is no return on the investment other than the satisfaction of helping you on your way. The only downside to this loan is that it will only be short term. Family will rarely be able to offer long term interest free loans.
Partnerships or NotAs a thank you for giving you a start-up loan you can offer your lender a partnership. If they too make craft items and are capable of helping you then you can offer them a full partnership for their money but instead of making it a loan it could be an investment, buying into the business. This will have to be arranged via a solicitor.
The other option is a sleeping partnership. This is when the lender is made a partner but with limited powers. They will have little or nothing to do with the daily operations of the business but they will keep an eye on the books to see how things are going. It is also polite to involve them in any major decisions that could affect their investment. A sleeping partner will not be on the books as an employee and you will not have to pay them wages. A sleeping partner is paid from the business profits, albeit in line with their investments. Remember they didn't give you their money, it was a loan.