Pros and Cons of a Business Loan From Yourself, Friends or Family

By Jay DesMarteau
TD Head of Commercial Distribution

Finding the right kind of funding to support the next phase of your business is an important choice. Whether you're starting a new business or looking to expand an existing operation, there's a lot to consider – starting with available funding sources. One way to access capital is to keep it close to home by borrowing from yourself, family or friends. Before you take that step, take a look at some of the pros, cons and questions you should keep in mind.

The pros and cons of borrowing money for your business from yourself

Using personal savings, credit or investments is a fast and common way business owners can access start-up funds or make business investments. This form of borrowing typically offers the greatest control—you don't need to pay interest to yourself, there's no application, the money is available right away and borrowing from yourself doesn't dilute ownership the way other lending options may.

Personal financial situations are prone to change, and if you experience any personal financial hardships, they could impact your business too. If you're planning to use joint assets you hold with someone else, consider exactly what business role the other person will hold and/or their expectations about the funds they're agreeing to provide. Through your company's start-up and initial growth, you may want to consider keeping your personal and business assets separate, for both risk and business image reasons.

Considerations when borrowing money for your business from friends or family

Some business owners use a combination of personal savings and borrowing from friends and family at the initial stages of the business. It's important to think about and discuss the concept of gift versus loan before accepting any money from family or friends for your business.

Determine if the money is a gift or a loan
If a close friend or family member is willing to provide you with a contribution towards your business, the temptation may be to take the funds right away. Before you do, take a moment and clarify if the funds are to be received as a gift or a loan.

A gift for your business from friends or family
A gift for your business should be very clearly identified as a contribution with no expectation of repayment. There still may be tax liability on a gift, and with a large gift you should legally document the contribution which may have additional legal expenses. Talk with your lawyer or accountant to make the right choice for your situation.

A business loan from friends or family
Like a bank loan, this loan will have a principal amount (the amount you borrow) and also could have an interest rate, fees and even a set payback period or term (how long you have to repay the loan plus any interest and fees). Business owners will often ask for a loan from people they know because it can offer very flexible repayment terms and schedule, and these should be documented in a legal agreement for the protection of all parties.

Set decision making expectations with whoever provides you a loan
Family or friends who provide you a loan or cash gift may feel that they are now part of your business and have the right to make or influence business decisions. Before you accept that loan or gift, make sure you fully discuss any future involvement in your business—not agreeing on those expectations up front may lead to relationship issues later.

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