How to Provide Small Business Loans to Friends or Family

How to Provide Small Business Loans to Friends or Family

Running a business and having sufficient capital to do that are two parallel lines. They never meet. Business Owners, no matter how successful, are always ruminating about needing more money to pump into their enterprise.

Taking money from the bank means having a good credit score, paying an interest over the borrowed amount and sometimes loan processing fees. Thus, friends and family seem an easier and only way out. So, when a family member or friend comes knocking at your door asking you to lend them money, saying no is the last thing on your mind. You want to help them.

The BIG question

There’s always that little voice gnawing away – Should you take this risk? After all, you are making a financial decision based on emotions. It goes without saying that whenever we hear this question, we somehow already know the answer – your money probably won’t come back for a long time. What if it doesn’t come back, at all?

Here’s a way out: Assess the situation appropriately and offer them a small business loan instead of handing them a big portion of your savings.

Going in with eyes open 

Unlike banks, loans given to friends or family do not carry interests. This is why if you help the wrong person, they may not take your goodwill seriously. The repayment, in that case, is slow, or nothing at all.

So, before you make this tough decision, think:

  • Has this person asked you for money before? If so, were you paid back?
  • Why do they need money?
  • Were you paid back in the committed time-frame?
  • What are the chances they will pay you back this time?
  • How are they planning on paying this loan back?

It is best to keep emotions out, draw an agreement, and treat it as a small business loan between two parties, not between two people who know each other.

 ‘Not a gift’

Say you offer to help a struggling entrepreneur in your family. If you just ask for their account details, they might confuse it for a gift. It is best to clarify that you’re helping them out, the money offered is a loan, and you expect to be paid back. This will leave no room for any confusion.

Use official banking channels

To keep a record of the transaction, use banking channels. This ensures that a paper trail is present, should any conflicts arise in the future.

Don’t forget the law 

Lastly, it is always good to check the tax laws. In the UK, one can give away £3,000, up to £5000 as a wedding gift and sums of money to children from the income as a gift, tax-free in a year.

If the loan amount is substantial and the person is investing in a commercial venture or a big purchase, it is best to secure the transaction loss with collateral. This way, if the business goes kaput, then you may recover your money through the collateral.

Did you find these tips useful? Share your views in the comment section.

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