Help from Family or Friends with Business Funding

Many new business owners believe that their start up finance will most likely come from the banks in the form of a business loan. The reality is that the vast majority of the new business finance in the UK comes from family, friends and colleagues. Grants and other forms of funding opportunities do exist, but your family should be your first port of call if you’re in need of start up capital for your new franchise.

From a personal finance standpoint, family and friends are an ideal source of funding opportunities. You should, though, still take financial advice and look carefully at your needs. Using family and friends as a source of financial support for your franchise should not be approached lightly. Don’t forget, your business depends on the funding that your family or friends may be offering. It’s imperative, therefore to understand the consequences of using this funding channel.

What Kind of Money?

The type of money that your family and friends could put into your new franchise business should be considered very carefully. You basically have two options:

Investment

In this scenario your family or friends will make an investment in your franchise business. This could mean they will have a proper share of your franchise, or they could become a sleeping partner. Your options are whether you want a shareholder in your business that is also a close relative or friend. As a shareholder they will require a return on their investment, which could put pressure on you and your business.

Alternatively, a partnership may mean you relinquish some of the autonomy you will have in the decisions you make regarding the day-to-day running of your franchise business. Ask yourself if you can or want to work with your family member or friend? Starting a franchise can be a stressful experience. Do you want to put this pressure on your relationship with your family or friends?

Loan

This is the easiest funding opportunity for your franchise that your family and friends can offer you. You simply arrange for a loan to be made to you that can then be used to fund your new franchise business. You should still take financial advice as the type of loan could have an impact on your business. Ask yourself if the loan will be over the short or long term. What level of interest (if any) will have to be paid? And you also have to consider the tax implications of using this type of funding.

Family and Friends Advantages

Using your family and friends instead of your own personal finance has a number of advantages that include:

• You generally won’t have to provide a detailed business plan as you would if approaching a bank or other financial institution.
• Family and friends tend to be more flexible as a funding opportunity with the terms of their loan or investment.
• Loans are usually made without any security that all banks will require to make any investment in a new business.

Family and Friends Disadvantages

Using your family and friends instead of your own personal finance has a number of disadvantages that include:

• Often loans or investments are made without any formal contracts or agreements. This can lead to misunderstandings with the resulting damage to relationships with family or friends.
• Investments can mean you have no choice but to work with someone you’d rather not. Family and friends can be difficult to work with as you have a relationship with them outside of the working environment. This can mean delegating work can be difficult, which could ultimately damage your business’s profitability.
• Family and friends may demand their money back at short notice. This could have an adverse impact on your franchise business’s cashflow.

Tax Considerations

Whether you have to account for the money that is being paid into your franchise business, or if your investor has to declare their investment, depends on if the loan has interest attached to it. Tax relates to loans of money and not grants. If the loan has no interest payable then no declarations have to be made, or entries in your accounts kept up-to-date.

However, if the loan has interest attached to it, your franchise’s accounts can deduct the interest as a business expense. The person making the loan and therefore receiving the interest must declare this as income on their tax records. Your local tax office can give you more details on how interest has to be handled for tax purposes.

Loans and Legal Status

It is always advisable to set-up any financial arrangements via a written agreement. Your solicitor will be able to draw up an agreement that clearly sets out the terms of the loan or investment. If at a later date there is a misunderstanding, both parties have a document they can refer back to.