Fast FAQs

Relatives are offering to finance my new business. Should I accept the money as a loan, or as equity capital?

It depends - on how much you want to raise, how long you need it for, and how good your relationship is with your relatives. If you take the money as a loan, you incur interest and repayment obligations which - initially at least - could be very substantial in relation to your income. However, unless the lenders have negotiated special terms on the loan relating to the management of the business and its financial performance, or the funding is secured on the assets of the business, they will have no rights to influence the way the business is run, providing the payments can be made.

Loan debt may cost less to service, in the long run, than dividend payments on shares, and interest payments can normally be set off against profits for tax purposes. But of course you will at some time have to find the money to repay the loan, whereas 'ordinary' share capital is not normally repayable.

For your relatives to take shares (ie 'equity') rather than lending money, your business will have to be incorporated, which in itself has tax implications. In buying the shares they acquire a stake in the ownership of the company, and therefore - depending on what proportion of the shares they get - rights to influence its management. You may have to get a shareholders' agreement drawn up to record any special understandings about how the business will be run, when the shares can be sold and so on. While they hold shares they will be entitled to any dividends declared on them. Unless you stipulate that under certain circumstances you will be entitled to buy back their shares, you may have difficulty in persuading them to sell at all, or to sell to you (see question 4, below).

If your business fails, relatives who have lent you money may be entitled to recover some of it from the proceeds when the assets are sold off, like other creditors. Relatives who have taken shares in the company are unlikely to recover anything.

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