How to Keep Family and Friends Loans Strictly Business – Private Peer Loans
You may have shunned the bank by borrowing from family or
friends, but you should still treat the loan as formal business. After all,
borrowing money is not the same as borrowing the car.
To be sure you and your family and friends have a clear idea
of what financial obligations are being created, you have a mutual
responsibility to make sure everyone is informed about the process and decide
together how best to proceed.
Drawing up a legal agreement can take some effort, and
involves stating the particulars of the loan like amount, term, interest rate.
It does, however, help to protect your relationship. You will also need to
create a loan repayment schedule and to specify whether the loan is secured
(that is, whether the lender holds title to part of your property or business)
or unsecured; what the repayments will be; when they’re due; and what the
interest amount is.
Too frequently, business owners fail to take the time to
formalise the paperwork when they borrow from family or friends. Often
owner-managers put more thought into figuring out what to buy than how to
structure this type of lending arrangement. Unfortunately, once you’ve made a
mistake, it’s difficult to fix.
It’s precisely for this reason that we have created Private
Peer Loans; to give small business owners the opportunity to create their loan
agreement, on terms that suit them, and to invite whoever they want. Loan
agreements with rebuildingsociety.com are a regulated financial instrument,
known as a 36H peer-to-peer loan agreement. These are eligible to be traded on
a secondary market, which allows the inception lenders to sell their future
repayments to new lenders, and also come with some tax benefits, such as bad debt
relief and the option of inclusion in an ISA wrapper.
Formalising the loan agreement protects both you and your
lender from HMRC. Relying on informal and verbal agreements results in tax
quagmires. With a formal loan agreement, you have a burden of proof to
demonstrate to HMRC that the money was not a gift.
If HMRC views it as a gift because there was no intention to
repay it, then the lender becomes subject to the gift tax rules and may have to
pay taxes on the money. Read more.
Any interest paid needs to be declared as income on a
self-assessment. If the person lending the money is a higher rate tax payer,
40% is taxable. However, rebuildingsociety members may open an Innovative
Finance ISA account to utilise their £20,000 annual allowance. Any interest
earned from funds loaned via an ISA account are free of tax!
Once your agreement is in place, your responsibilities
begin… Don’t make assumptions or take people for granted just because they are
friends or family members. Communication is key. To make things easy for you,
each rebuildingsociety.com loan comes with a forum which allows you to have one
place to communicate with your investors.
If your relative or friend is not actively involved in the
business, make sure you contact them once every month to explain how the
business is going. When people invest in small businesses, it often becomes a
passion, so it’s important to take the time to keep lenders informed.
And, of course, there are the repayments. Though friends or
relatives may understand your business and the risks involved, you must never
take the loan for granted. Don’t be cavalier about paying back your lenders.
That kind of attitude will abruptly ruin your relationships.
It helps to have an intermediary in place when times are
tough. Having an agreement that allows you to make occasional interest-only
repayments can really help with cashflow issues, especially since there are
normally two months in any year when business performance is affected.
If the loan needs to be refactored to adjust the repayment
amounts, or if a repayment holiday needs to be arranged, that can be quickly
and easily facilitated online to change the repayment schedule.
Also, as your business grows, if the firm needs to borrow
more than the family wants to lend, with a good repayment history you can
promote your loan listing to a public community of investors to consider.
Though you may face some tough questions.
Why choose
rebuildingsociety?
We pass on 100% of the rewards
It is possible to lend at interest rates of up to 20% on our
platform because we do not take a margin, so 100% of the interest paid by
borrowers is relayed to the lenders. While the rewards are high, sometimes the
risks can also be significant, you should not expect every loan to make every
repayment on time. After 5 years, our risk-adjusted rate of return is 8.9% per
annum after defaults, fees and bad debt. Our past performance is good, but no
guarantee of future performance.
With > 5 years of
history, you can trust us to deliver on our promises
We work hard to find and approve opportunities for you to
fund. Most perform well and repay their loan with interest, but not every
business is successful. We work hard with collaborative entrepreneurs to keep
them performing, but the truth is that some businesses will fail.
Contact us:
Rebuildingsociety.com
Add: No 1 Leeds, Fourth floor, 26 Whitehall Road, Leeds West
Yorkshire, LS12 1BE UK
Call us: 0113 8150
244
Email us: support@rebuildingsociety.com
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