OPTION #1, The Bank of Mom & Dad, Friends & Family Financing.

Many Vancouver area entrepreneurs seeking to fund their start-up enterprise or venture often turn to a lender that; overlooks weak points, provides flexible terms, and offers a “dream-come-true” interest rate. The Bank of Mom or Dad. Without an established track record, start-ups often have trouble getting a traditional bank loan or funding from venture or “angel investors”. So after tapping their savings, founders often turn to informal investors, which usually mean family members and friends.

The proverbial “rich uncle” can often be the lowest hanging fruit & overall the easiest to deal with, particularly when it comes to repayment terms. Such arrangements combine best wishes, a pay-me-when-you-can attitude, and few expectations of a meaningful return. That might be the most realistic view of family and friends financing. So in many cases, it might be wise to not formalize the loan since doing so can raise expectations that it will be repaid in full.

Many people will opt for a loosely structured deal in which, for example, repayment may start only when a company has reasonable cash flow and can afford to make payments. A position many businesses don’t reach until three to five years down the road, if at all. Such an arrangement doesn’t raise expectations of prompt repayment. But such vagueness can lead to problems and confusion later on, prompting some experts to urge putting into writing whether funds are a loan, a gift or an investment. Still, terms of the agreement need close attention. Failure to collect interest or a repayment might prompt the CRA (Canada Revenue Agency) to decide the “loan” was actually a gift and impose gift tax and other penalties.

Some financial planners note that family members can provide money as an annual gift, helping reduce the size of an estate subject to taxes. Gifts also ease worries of conventional lenders who might be concerned that family loans could impair their ability to collect. One other thought: Some family members who provide loans or gifts think the funds come attached with the right to have a say or participate in the business. Proper concise & purposefully worded documentation can spell out such issues. BCBIZDEV can assist you in structuring a program that you can easily approach your friends & family with. This will assist with inspiring the confidence for you to avoid the awkward uncertainty of surprise questions which you may not have contemplated.

We can help you in person (by appointment) in the Greater Vancouver Area (GVRD), including; North Vancouver, West Vancouver, Burnaby, Richmond, Delta, Surrey, Langley, Fort Langley, White Rock, Coquitlam, Poco, Pitt Meadows, Maple Ridge & the lower Fraser Valley; Mission, Abbotsford, Aldergrove, Chilliwack.

Click here to inquire about how we can help or phone 604.757.1969