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Growing a business:
Family loans

It is common for family businesses to borrow money from other family members. This can, however, create future problems relating, for example, to misunderstandings over the terms of repayment that have been agreed. Consider preparing a business plan and presenting your business case to the family with the same degree of care as you might adopt for obtaining money from your bank manager.

If you looking for longer term or permanent funding, you might be better raising the finance by selling shares in the company to the family member, or by bringing in the family member as a partner in the business, rather than by taking a loan. In this way it is clear that the family member is risking capital, but can potentially share in the growth of the business. You would also need to agree the extent of any influence that the family member has in the running of the business.

If you do take a loan, make sure that the repayment terms and interest rate are agreed. You should also discuss the risks that are involved in making the loan, and the lengths to which the family member expects you to go to repay the loan if, for example, the business fails. It is best to draw up a written loan contract, as this may avoid any misunderstandings later on.

If the family loan is interest bearing, there will be tax implications. The lender must declare the interest as taxable income and you may be able to get tax relief for the interest payments.