Financing from friends and family
Financing from friends and family: loan or investment?
Before you approach a friend or relative for funds to support your business, be clear about what your requirements are.
If your business needs immediate and relatively short-term funds, a loan may be most appropriate. Decide whether you can afford to pay interest, or whether you are seeking an interest-free loan. If you do pay interest there will be tax implications for both you and the lender.
If the business needs longer term or permanent funding, you may want to consider giving your investor a share in the business.
If you choose this option, think about whether you need an active partner or shareholder. If you are just looking for a passive partner who will have no involvement in the business, make this clear. As a rule of thumb, retaining at least 70 per cent of the shares issued should ensure you keep control.
Explain to your investors that the money they invest is risk capital - they may not get it back. However, if your business goes well, they might look for returns that reflect the risk, ie greater than they would receive if they placed their money in a bank.
Remember that whether they make a loan to your business or take a share in it, the investor should not lend or invest more than they can afford to lose.
Ask the friend or relative to set out their expectations clearly and plan how you will manage those expectations. This can help create a win-win situation for you and for your investor.
For advice on approaching a friend or relative for funds talk to your local Enterprise Centre.
For more specific financial advice on your particular situation, talk to your accountant.