Many entrepreneurs rely on informal loans from friends and family to fund their business. Whether it's cash to get a start-up off the ground, acquire a new business or simply improve cashflow, entrepreneurs often turn first to friends and family. These loans are usually the cheapest and most cost-effective way for a company director to raise funds.
With a privately syndicated loan from rebuildingsociety.com, a formalised loan agreement is put in place to help friends and family safely support the business of someone they care about.
What are they key benefits?
A formalised loan agreement gives investors a legal basis to recover the loan should anything happen to the director or the business. Without a formalised loan agreement, friends and family who invest in a business are not protected and are likely to lose their investment if things go wrong.
If a director wants to repay friends and family with interest, the investors can use the Innovative Finance ISA wrapper, which has all the benefits of a standard ISA. It's an efficient way for family and friends to invest.
While a verbal understanding might seem sufficient at the time, it could be difficult to remember the details months later. It's so important to have a written agreement to protect personal relationships.
The privately syndicated loan process is completely confidential, allowing a director to borrow only from trusted friends and family. Management accounts and detailed explanations won't need to be shared publicly online. Unlike publicly funded loans on the rebuildingsociety.com platform, no one outside the private circle will ever know that the business needs funds, or why.
The business director decides what interest percentage to pay friends and family, and sets an affordable monthly repayment schedule that works for both the business and the investors. Details of the loan agreement are flexible, such as whether to impose penalties for late payments, what happens in case of a default, and what exactly the funds will be used for.
Entrepreneurs may need funding, and with a privately syndicated loan, they don't need to relinquish any control to investors, like in the case of equity or profit-sharing crowdfunding.
Things to consider
- Can investors afford it? While it may be difficult to say no to someone they care about, investors should consider if they can afford to tie up their money for the period of the loan.
- Although a free downloadable loan agreement template might seem like an adequate solution, it's not a safe option. A clear and properly drafted loan agreement ensures everyone has peace of mind about the legality of the document. A written agreement also clarifies the loan duration and terms, preventing future disagreements about the terms.
- Keep the lines of communication open; friends and family who invest in a business want to know how the business is doing. They also want to know if the business will pay off the loan as planned. A loan from a friend or family member is well-intentioned, enabling a loved one to develop a business. Nonetheless, the money will still feel like an investment. This is a loan, not a gift.
The Director's Loan Account ISA
Apart from friends and family loans, entrepreneurs often finance a business through their own resources. This may include savings accounts, selling a property or cashing out ISAs.
With a Director's Loan Account ISA from rebuildingsociety.com there's no need to cash out an ISA to fund a business!
Using this innovative product, a director can provide a Director's Loan to their company. The business will then repay the capital with interest to the director's Innovative Finance ISA account.
Contact us on 0333 303 0972 or email us at support@rebuildingsociety.com for more information.
