A close family member has asked to loan money for a start-up?

amaze

Hi

A close member of my family has asked to lend a decent amount of money (10's of 1000's) to start a new business. I have a bit of "free cash" right now so happy to do so if I think the business will be successful after reading the business plan.

I am not looking to make interest on this as I am doing it as a favour, however I want to ensure that everything is clear before going ahead so there are no issues later on. I am guessing a "loan agreement" would be best for this? I don't want to "secure" the loan to a house or anything as feels a bit "heavy", but maybe secure it to the business in some way?

Any other tips\advice on this on the best steps forward?

Thanks

opinions4u

1) 50% of businesses fail in the first year. 90% in the first 5 years.
2) Why won't the bank lend the money?
3) You will have the power to call your loan in - and destroy the business.

To answer your question, pay for a solicitor to draw up a contract.

Personally, I wouldn't touch it with a bargepole.

If I was a Dragon and convinced of the brilliance of the business plan, I'd want a stake in the business, and I don't mean a nominal 5% or 10%.

Apples2

Tips available from Dragons Den - Make them present their model, then ask for a 49% stake.

If it were a sound business model, banks would probably lend - Is there (or vice versa!) a reason why they won't?

Loan agreements aren't worth a wipe if there is nothing to repay you with.


EDIT: Bah, beaten to it, including the Dragons Den swipe...too slow today

Malky

By all means invest in the business if you think it's a good idea. Personally, I wouldn't lend to get the business up and running. That's what banks are for. If the bank won't lend the money then you really need to be finding out why before deciding to invest your hard earned.
How much of your family's own money is going into the venture?

BackOnTrack

Doing this as a loan is a silly idea to be frank. As has been said above new businesses have very high failure rates therefore you need a high potential return to make the risk worthwhile therefore if you are to supply some cash ask for a reasonable stake in the business. Only do this if you are comfortable with losing all the money you invest as even businesses with good ideas and that are well run fail due to circumstances outside their control.

DCFC79

Be interesting to know why the bank wont lend the money

Needhelpsaving

Don't do it. From personal experience, I would not loan money to any relative again - unless you are willing to write it off as soon as you hand it over?

lawrie28

opinions4u wrote: »

1) 50% of businesses fail in the first year. 90% in the first 5 years.
2) Why won't the bank lend the money?

The answer to question 2 is statement 1.

lawrie28

Banks won't lend to startups unless there is security- property basically.
The reason is they don't want to lose the money.

So maybe you should ask for a charge over the property. Makes them think you are serious about it.

Taking an equity share in a business does not mean that you will get any money back. In fact, if the solicitor draws up a Ltd company and uses your loan as Share Capital, then you own the shares in the business, and can't pull the money out.


You need to loan the money to your relative, not the company. That way if the company folds, you still have an avenue to persue.
By all means ask for a share in the business as well, but make clear that this is gifted to you, rather than you buying it from your friend.

With dragons den, they ask for a share in the business because it maximises their returns, but is by far the most risky way of injecting cash into a business. A loan to the directors is generally more secure.

Why do they need so much to start up?
What is their history in running a business?
what is their history in the line of work of the business?
why don't they have the money?
what happens if you lose the lot - what are the consequences for you?
what happens if you fall out with friend?
Is it a growing market?
is it a compeittive market?
have they got a business plan?
why is it going to be a unique business?
when would you get your money back?

These are just some of the questions you need to get answers to, and be 100% happy with, before you even think about lending money.

lawrie28

Oh, and if you don't want the loan to be "heavy" can I borrow £50k from you?

POPPYOSCAR

Do it if you want to but be prepared if it all goes wrong:-

1. to write off the money if need be
or
2. fall out with said family member(and possibly others in the family)

Not something I would undertake in a hurry!.