Friends and Family

Quick Insight

Borrowing from friends and family may appear as an easy source of cash but can be very dangerous. Prepare a detailed loan agreement so that everyone clearly understands the terms of the loan. Making sure everyone clearly understands now helps protect the relationship in the future.

Borrowing from friends and family may appear as an easy source of cash but can be very dangerous. Prepare a detailed loan agreement so everyone clearly understands the terms of the loan. Be clear about what happens if you can't pay the loan back. The agreement should clearly state that the person providing funds is making a loan and not becoming an owner.

The first decision is to clarify whether this is a loan or an ownership investment in the company. If it’s a loan, you only owe them interest. If it’s an ownership investment, you just gave them rights to the future income of the company. Make things clear with an agreement.

The loan agreement should also clearly state the consequences if you can’t pay on time. Your friend or family lender may become scared if you’re struggling to make payments. Set the terms of the agreement while everyone has a level head.

The biggest concern with friends and family is to think through the impact on the relationship. Consider these questions:
• If you had cash struggles, would this damage the relationship?
• Is the loan worth jeopardizing the relationship?
• Would receiving this loan create the expectation that you are obligated to do something similar for the other person for the sake of the relationship?

I wish you a loan agreement that protects your relationship as well as your finances. I wish you well.
- Rob Stephens

Further Insight

Loan Agreements With Family And Friends on Debt.org

CFO Perspective Resources

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Course: Business Loan Basics - You'll learn the types of loans, how to navigate the loan process, and how to save interest costs.
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