Taking Loans From Family and Friends

Taking Loans From Family and Friends

July 1, 2020 by investor

Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

Many startups use loans to fund their business. If you are taking a loan from family and friends, here are some points to consider:

The first step is to determine the amount of the loan and how it will be disbursed to the startup.

There are time-based disbursements. For example, the startup gets $20,000 now, $20,000 in three months, and the final $20,000 three months after that.

Then there’s milestone-based disbursement in which the funds are disbursed when the startup reaches specific milestones or goals, such as prototype complete, product complete, customer sold.

The loan should be made to the startup and not the founder. 

You want clear dividing lines between the assets of the startup and the personal assets of its founders. Comingling personal assets with those of the startup is a bad practice.

Avoid no-interest loans and establish an interest rate of at least 3%.

If you set up a no-interest loan, the IRS will assume an “imputed interest rate” and tax the lender on an “assumed” amount of interest on income received.

Determine if a personal guarantee and/or collateral are required.

Most startups don’t have assets aside from the intellectual property (IP) created by its founders and employees, so collateral is usually limited.

A personal guarantee states that the entrepreneur will agree to be liable for repayment of the loan if for some reason the business cannot make the payments.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.