Start-up funding: Borrowing from friends and family

April 28, 2014 - Tags: Planning Startup

As a new business owner or potential entrepreneur, you may have difficulty finding the start-up funds you need using traditional means, or you may have used all your available funds. If your family members or friends have the financial means to help you in your business venture, you may want to consider approaching them for financial help to get your business off the ground.

Borrowing from family or friends should be treated like any other loan agreement. Begin with a written and signed contract. You may wish to seek legal advice to draw up the contract or, at the very least, have a lawyer review the contract you have created. The lender may also want to consult with a tax professional regarding any tax regulations on this type of loan.

Present a business case to family members so that they know what they are signing on for. Offer clear and honest information and projections. Include the following in your proposal:

  • Term of the loan, payment amount, and repayment schedule
  • Is the lender investing or simply lending you the funds? Be clear.
  • What is the interest rate? Is it calculated and compounded every day, week, month, quarter or year?
  • Process for managing late or missed payments, including penalties
  • How and when the loan will be paid if the business fails
  • Special payment arrangements, such as no payments for the first year, interest-only payments, seasonal payments, or bonus payments

During the repayment period, provide the lender with updates on the business' progress and whether you're on target for growth (and repayment).

Your friends and family can be an excellent support system for you when you are starting up your business. If they're able to provide it, this may include financial support that is more flexible than a traditional bank loan. With a proper loan agreement and repayment plan in place, your friends and family may be able to put their money where their support is.

Explore other private sector lenders or search our Find Financing Tool for more start-up funding options.

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