Guide

Financing from friends and family

Legal agreements with friends or family

If you decide to finance your business from a friend or family member's investment, you can prevent misunderstandings by having a formal agreement in place. The agreement should be witnessed by an independent person.

Key elements to include in a written agreement are:

  • the nature and timing of return on the investment - such as how much a loan is for and whether an investor is to receive profits or a share in the business
  • a repayment schedule or timed plan of dividend payments - include dates, amounts and interest on loans if applicable
  • respective responsibilities - for an investor this should state whether they are to have a role in the business or any liabilities
  • how any problems will be resolved

This will ensure both parties are clear about the terms on which the money will be transferred.

You should both consider getting legal advice if the loan amounts involved are substantial for either of you. For professional advice you can search the Law Society of Northern Ireland’s solicitor directory.

For loans, you can reduce the cost of legal advice by preparing a draft agreement to discuss with your legal adviser. Some websites will prepare a draft promissory note - a legal document that is less formal than a full loan agreement, but which still sets out all the relevant details clearly.

For more complex investment agreements, both parties should decide the role and responsibilities of the investor and what their rewards - such as shares or dividends - will be prior to asking a professional to draft a full agreement. For more information read company shares and shareholders.