Funding Your Business: Why Informal Loans Need Careful Consideration

Why Family Loans Can Go Wrong

Mixing family and finances isn’t just awkward, it can be risky for your business.

• Emotional Pressure: Even small loans can create tension. You may feel guilt if repayment is delayed, while family members might expect a say in business decisions.
• Informal Agreements: Many overlook the need for formal documentation. Without clear terms, misunderstandings can escalate.
• Tax Implications: HMRC treats loans between individuals differently depending on whether interest is charged. For example, interest-free loans above £10,000 may be considered a benefit in kind, potentially triggering personal tax liabilities. HMRC’s guidance on loans to participators outlines the rules for small business owners.
• Risk of Loss: Unlike professional investors, family and friends may not be able to absorb losses. A failed business can damage personal relationships irreparably.

The Cost of Mixing Business and Relationships

Beyond emotional strain, relying on family can limit your business’s potential:

• Limited Funding: Family resources are finite and may cap your growth.
• Missed Professional Support: Banks, angel investors, and government schemes often offer more than just money, they bring guidance, networks, and credibility.
• Conflicted Decisions: Family involvement can unintentionally influence key business choices, potentially compromising your strategy.

In short, borrowing from loved ones may solve an immediate cash need but could hinder long-term growth.

Alternative Funding Paths to Consider

Instead of risking personal relationships, explore structured, professional funding options. As accountants, we help clients assess these routes and, where appropriate, refer them to authorised financial advisors or lenders.

Here are some options UK SMEs can consider:

1. Government-Backed Loans and Schemes

• Start Up Loans: Fixed interest rates, defined repayment terms, and mentoring support.
• British Business Bank Guarantees: Help SMEs secure bank finance with reduced risk.

2. Professional Investors and Equity Funding

• Angel Investors & Venture Capitalists: Provide capital in exchange for equity, along with strategic input and credibility.

3. Bank and Specialist Business Loans

• Commercial Loans: Term loans or revolving credit facilities tailored for SMEs.
• Tax Efficiency: Interest payments may be deductible for corporation tax purposes.

4. Alternative Finance Options

• Invoice Financing & Merchant Cash Advances: Release working capital without giving up equity.

When Friends & Family Can Work 

Borrowing from loved ones is not always off-limits. The key is:

1. Written Agreement: Clearly document terms, interest, repayment schedule, and contingencies.
2. Transparent Communication: Discuss risks openly to set expectations.
3. Cap Amounts: Only borrow what wouldn’t cause personal hardship if lost.
4. Tax Awareness: Understand potential benefits-in-kind implications and report correctly.

With proper boundaries, a family loan can act as a bridge rather than a trap.

Take the Next Step

Don’t let cash flow fears push you into risky decisions. Speak to our team to assess your business’s financial position, explore structured funding options, and protect both your relationships and your ambitions. 

At Wright Vigar, we’ve built a trusted network of professional contacts, including regulated financial advisors, commercial lenders, and funding specialists. If your business needs support beyond accounting, we can connect you with the right people to help you move forward with confidence.