Thrings Farms, partnering with Farmers Weekly, answer readers’ questions. Conor Melvin advises on loaning money to family to start a new business.
I plan to lend one of our children £30,000 to start a new venture which has nothing to do with our large-scale mixed farming partnership. Their business idea is sound and they are not involved in the farm business. The loan will come partly from my personal savings and investments and partly from farm profits. It will be repaid over a period of several years, once their new business is under way. How should I structure the repayments and the terms of the loan not only to formalise things but also to ensure that if anything happens to me, all is clear and that the cash will eventually be repaid, to my estate if I am gone.
When lending to family members it’s important to carefully consider and document the terms of the loan, ensuring clarity and helping to prevent future issues within the family. When making a loan, there are several aspects to consider.
Loan Agreement
The loan should be documented clearly in writing, preferably as a written loan agreement. The agreement should cover the following:
- Who is making the loan? If monies come from a business to allow the lender to fund the loan this should be carefully documented to avoid confusion over who repayment is due to.
- How much is being loaned and how and when is it advanced? (e.g. in one payment, or drawn down over time/based on specific events);
- What are the repayment terms? Is there a fixed repayment date or regular repayments? When will those repayments start?
- Can the loan be repaid early?
- Is the loan going to carry interest and if so when is it payable.
Securing the Loan
However well intentioned, things can go wrong when starting businesses. If you lend to the business and it subsequently becomes insolvent or defaults, then you would be an unsecured creditor. Therefore, consider options to secure your loan to maximise your chances of recovering the loan. The most common types of security are:
- Guarantee – either a personal guarantee from the shareholders of the business or a guarantee from another connected business;
- Legal Charge – a charge could be taken out against any property owned by the business; or
- Debenture – a form of charge registered against the company. The document itself will detail exactly what is secured, but it often secures all or most of the assets of the company.
Even when lending directly to an individual, you should still consider guarantees and/or legal charges to secure your interests if that individual was to declare bankruptcy or default on repayment.
Changes to the business
It’s important to consider what might happen if there are changes in the business. For example, if the business is sold in the future, you could be left awaiting repayment from the business now under new owners. Consider including certain acceleration events in the agreement which would trigger early repayment. If there was a change in ownership of the company, that could trigger immediate repayment.
The agreement continues to be binding on the borrower if something happened to you, and they would owe their obligations to your estate, but consider whether your death should trigger early repayment. You should ensure other parties are aware of the agreement, perhaps keeping a copy with your will so that executors are aware.
We also recommend taking legal advice when entering into such an agreement to ensure you are sufficiently protected.
