Setting up a loan or investment with friends or family
Why you should treat finance from friends and family as a formal arrangement.
If you decide to accept a loan or investment from friends or family you should approach it as if it were a formal finance deal.
This will involve:
- presenting your business plan
- preparing a business case
- taking professional advice
- creating a formal, written agreement
Before approaching a friend or family member you should create or revise your business plan so that you can demonstrate your plans for the business and their investment in it. Make your proposal with the same considerations as you would for any formal lender or investor. The friend or relative will need to know how their money will be used and the bigger picture for your business. Make them aware of all risks and worst-case scenarios.
You need to make a business case that will persuade them to finance your business instead of their own personal plans.
Sources of help
It is sensible for both parties to get professional advice if the amounts involved are substantial. This will help you both consider factors objectively, without feeling under pressure and to reach a decision that you feel comfortable with.
For professional advice you can search the . Many accountants will also advise on the issues and will draw up an agreement - see choose an accountant for your business.
If both parties agree to proceed, formalise the arrangement with a written agreement. This will help prevent future misunderstandings and provide a solid basis for the business relationship. A loan agreement should cover the loan size and terms, the repayment plan and interest rates.
Investment agreements are more complex and should include the amount invested, the allocation of profits and shares, roles and responsibilities of both parties and a repayment schedule. You should seek professional advice to help you draft any written agreements.