Offer An Equity Interest
Some friends and family might prefer an equity interest in the business. An equity investment will give the investor a share of the business. This means that the investor will share the profits and losses as a co-owner of the business. Unlike a loan, if the business fails there is no obligation to pay the investor back. The investor, therefore, bears all risk, unless there is a guarantee on the investment.
Most investors are unprepared to risk more than they have invested. A business that operates as a sole proprietorship becomes a general partnership when an equity investor becomes a part of the business as a co-owner. General partners are subject to personal liability for the debts of the business. To shield an equity investor from bearing more loss than the initial investment, consider converting the business to any of the following business structures if you offer an equity interest:
- Corporation: The investor can become a . A shareholder that does not participate in running the business or in making decisions is free from liability beyond the investment.
- Limited partnership: A limited partner that is not involved in running the business will not incur personal liability for the business.
- Limited liability company: An investor that becomes a member is shielded from liability for the debts of the business, unless the member engaged in wrongful conduct.
The Pros And Cons Of Borrowing Money For Your Business From Yourself
ProsUsing personal savings, credit or investments is a fast and common way business owners can access start-up funds or make business investments. This form of borrowing typically offers the greatest controlyou don’t need to pay interest to yourself, there’s no application, the money is available right away and borrowing from yourself doesn’t dilute ownership the way other lending options may.
ConsPersonal financial situations are prone to change, and if you experience any personal financial hardships, they could impact your business too. If you’re planning to use joint assets you hold with someone else, consider exactly what business role the other person will hold and/or their expectations about the funds they’re agreeing to provide. Through your company’s start-up and initial growth, you may want to consider keeping your personal and business assets separate, for both risk and business image reasons.
Can My Limited Company Loan Money To Another Limited Company
Of course it is the case that a limited company can loan money to another company, but there are quite a few things to consider.
And because company-to-company lending is a huge topic, our guidance on loaning money from one company to another will focus on the scenario where a sole shareholder director owns two UK trading companies, writes Eloise Brown, senior tax knowledge manager at chartered accountancy firm Moore Kingston Smith.
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Other Family Loans That Are Safe From Tax Consequences
You dont have to worry about family loans being subject to gift tax rules if:
- You lend a child $10,000 or less, and the child does not use the money for investments, such as stocks or bonds.
- You lend a child $100,000 or less, and the childs net investment income is not more than $1,000 for the year.
Consider Making It Secured
Whether or not youre certain things will work out, it may be worth requiring collateral on the loan, such as some of your business inventory or equipment.
That way, if your company cant pay you back or it fails, you can lay claim to some of the companys assets to get some or all of your money back.
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How To Keep Family And Friends Loans Strictly Business
When borrowing from friends and relatives, make sure both parties are protected by putting the loan agreement in writing.
You may have skirted the bank by getting a loan from family or friends, but you should still treat the situation as strictly business. Putting the agreement in writing not only protects both parties but also your relationship. After all, borrowing money is not the same as borrowing the car.
First, you must state how much money you need, what you’ll use it for and how you’ll pay it back. Next, draw up the legal papers–an agreement stating that the person will indeed put money into the business.
Too frequently, business owners fail to take the time to figure out exactly what kind of paperwork should be completed when they borrow from family or friends. “Often small-business owners put more thought into figuring out what type of car to buy than how to structure this type of lending arrangement,” says Steven I. Levey of accounting firm GHP Financial Group. Unfortunately, once you’ve made an error in this area, it’s difficult to correct it.
Most important, says McKeever, “Outline the legal responsibilities of both parties and when and how the money should be paid back.” If your loan agreement is complex, it’s a good idea to consult your accountant about the best ways to structure the loan..
What Should A Loan Agreement Include
A loan agreement is a document that details the specifics of the loan. A typical loan agreement contains details of the lender, the borrower, the amount to be loaned, the start date of the loan, repayment date and if the loan is be paid through instalments or in a lump sum.
It may be tempting to write this yourself, but if for any reason, the borrower defaults on the loan, you want to ensure that youve covered everything in the agreement, so you can get the money back. For that reason, we strongly advise that you engage the services of a solicitor to assist you.
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Ways To Grow Your Business With A Loan
If you are a small business owner, you may need a cash injection to grow your business. A loan can provide the best solution. However, entrepreneurs can balk at the need to pay the interest that every loan carries. While its true that interest payments do eat into your profits, you need to look at this issue from a different angle.
The question that you should ask yourself before taking a loan is
Will the monetary benefit that my business gets exceed my interest payouts?
If your answer is in the affirmative, then you can consider your interest rate to be fair. Definitely, you should go ahead and borrow the money that your business needs.
How can your company use the money that it borrows?
Were not short of ideas.
Just keep reading.
Felicity Glover Personal Finance Editor At ‘the National’
The good news is that there is no legal requirement for a person to be in the UAE to pay off a personal loan.
However, you will need to discuss your situation and plans with your bank before you leave the UAE in December.
Each bank has different policies and approaches to this type of situation, but they do accept loan repayments from overseas based on an official agreement between the two parties.
It is important to finalise this before you leave the country as you may face a travel ban or other legal consequences.
You should also be aware that when your final salary is transferred to your account, the bank will freeze it as you have a personal loan and it is likely that it will be used towards the debt.
Your first step should be to arrange a face-to-face meeting with a bank representative so you can explain your situation.
Bring evidence of your ability to continue paying the loan. Follow up the meeting in writing by sending an email to the bank to confirm what was discussed and any agreement you may have come to with the bank representative.
You appear to have a good credit history and this will stand you in good stead with the bank. However, the terms of the loan may be updated if the bank agrees to your request.
I wish you all the best with your studies and new chapter.
The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to [email protected]
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When Is It The Right Time To Apply For A Business Loan
Considering the fact that you will be assuming a certain amount of debt when you take out a business loan, you want to make sure you are doing it for the right reasons. Youll be responsible for making regular payments, and failure to do so can have a negative impact on your credit and financial profile.
That said, there are some sound reasons why you may want to take out a business loan, including the following:
You want to build business credit As a business owner, building a strong credit score is important . Without it, it will be difficult to get approved for any loans in the future. By making timely payments on a business loan, you can effectively build up your credit.
You need to expand If business is going great and youre finding that your current situation is not enough to accommodate further growth, it might be time to expand your current space or move to a new one.
You need to hire new staff Along with a growth in business often comes the need to add more staff to your roster. As with anything else in your business, this requires money, which you can get from a business loan.
You need new equipment Whether you need to accommodate growth in business, are just starting out, or simply need to replace obsolete equipment that you already have, a business loan can help you finance such expensive purchases.
Can You Have Multiple Loans
In short, yes, but when it comes to having multiple business loans this depends on the type of loan
Loan stacking is possible but is something that we and most financial advisers will recommend to stay well away from. You may or may not have heard of loan stacking but unfortunately, the foolish practice is increasing. The percentage of borrowers who stacked loans actually doubled between 2013 2015 according to the Wall Street Journal.
Loan stacking definitiona cash advance or a loan is approved on top of a loan or advance that already exists with very similar terms
Although stacking loans on top of one another may work for some, it can lead to a debt that spirals out of control, spelling bad news for businesses. Most business owners simply cant keep up with that much debt and the lenders lose out as well with an increase in defaults.
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Crowdfunding & P2p Loans
Crowdfunding or P2P loans can be another option if youre looking for business acquisition money, though crowdfunding by itself likely wont pull in enough funds to cover the entire business purchase. There are various types of crowdfunding for businesses, including equity-based crowdfunding and rewards-based crowdfunding. Even charitable giving sites can sometimes be used for business.
Crowdfunding could be an option for you if your business purchase will enable you to produce an innovative product with which you can reward your backers, or the purchase will increase your businesss net worth, which you can share with your backers in the form of equity.
Similarly, peer-to-peer business lending allows business owners to borrow directly from interested investors in an online marketplace or even from peers in their personal networks. A third party provides an online platform that packages the loans and may charge a fee for their services. Because multiple parties typically fund P2P loans, the concept is similar to crowdfunding.
With crowdfunding and P2P lending, having an innovative, community-minded business plan and a strong online presence will help convince would-be investors to fund your business purchase. Generally, it helps to have some business experience/time in business for lenders/backers to be willing to take a chance on you.
Which Legal Business Structure Is Right
A business can be organized as one of multiple business structures, such as a corporation, limited liability company , partnership, or sole proprietorship. The advantage of LLCs and corporations is that they protect the business owner from personal liability for the obligations of the business. Note that its more difficult to move personal money into a corporation due to the formalities that need to be followed , so an LLC may be a better entity. Regardless, some type of corporate structure will be needed should you choose to get a small business loan.
Consult a certified public accountant or Attorney for Your Best Option: Talking to an accountant or attorney about the best option for your businesss legal structure is a good idea. Both will offer you advice on the potential implications of changing the business structure.
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How Do I Calculate How Much I Can Borrow For A Business Loan
You can use a business loan calculator to determine your monthly payments, the interest cost for financing your project and an amortization schedule.
Then, enter the amounts on your cash flow forecast to see the impact of the loan and projected sales growth from your project.
A rule of thumb is that your borrowing capacity is guided by your net income plus depreciation, less the annual amount of repayments of existing term debt. Any unused room in your borrowing capacity is available to cover new debt service.
You may be surprised at the amount you can afford to borrow. Newer businesses tend to overestimate their ability to take on a loan, Mittra says. On the other hand, more mature businesses often underestimate how much they can afford to borrow.
Paying Your Loan Back Too Fast
Many business owners want to pay back their loans as quickly as possible in an effort to become debt free. Again, its important to reduce debt, but doing so too quickly can cost your business. Thats because you may leave yourself short of cash. Or the extra money youre devoting to debt reduction might be better spent on profitable growth projects.
SolutionCompare your projected return on an investment to how much interest youre saving by paying down your loan faster than required. If you expect to earn more investing the money in your business, consider slowing down your repayment pace.
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Tax Implications For Llc Loans
The IRS could consider your loan a taxable distribution. This could happen if the amount borrowed exceeds how much you contribute to your LLC. In this case, the IRS could classify the distribution as a taxable gain.
A loan to a member might also incur tax if the loan is canceled. The cancellation would become a distribution and taxable as income to the borrower.
If you borrow money from your LLC, you should pay interest on the loan every month or every quarter, much like you would on a commercial loan. The interest rate must be at least the federal rate the IRS charges for delinquent balances.
Take A Bad Debt Deduction If Your Child Doesnt Pay You Back
One of the advantages of a loan contract is that if your child doesnt pay, you can take a deduction for a non-business bad debt.
Additionally, you dont have to pay gift tax to the IRS on the amount you would have if you had gifted the money.
To take a bad debt deduction, you must prove that you tried to collect the debt.
The debtor should make a written statement that he or she cannot pay. The statement should also include a reason for why they are unable to make the payments.
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Debt Panellist : Carol Glynn Founder Of Conscious Finance Coaching
Congratulations on taking the next step in your studies.
It is very possible to pay your UAE loan off from overseas.
It is not a legal requirement to stay in the UAE while you pay off your debt. However, banks tend to get nervous when borrowers leave the UAE with unpaid debt.
Each bank will have a different approach to this kind of situation, so it is difficult to predict how they may react to your plans to leave the country.
It is wise to visit your bank branch and speak to your relationship manager and the loan department to explain your plans to repay the loan. It is important to do this before your final salary is paid.
It would also be very helpful if you can show your bank evidence of how you plan to repay the loan while studying.
For instance, do you have proof to show you will be working and can afford to make your loan repayments? If yes, make sure to take this with you to the bank.
When your employer cancels your visa and pays your end-of-service gratuity, the bank will be notified and will likely freeze your account/s until you provide a new employment visa and Emirates ID.
This will mean you cannot access your final payment or any other cash you have in your accounts.
The bank is within their full rights to call in the full amount, so it would be wise to prepare for this potential scenario.
Alternatively, if the bank does agree to to your request, the loan’s interest rate and some other terms might change.
Put The Terms Of The Loan In Writing
The terms of the lending arrangement should be in writing. An arrangement should include the terms regarding the interest rate, late fees, repayment terms, and the length of the loan. A written agreement establishes the legal obligations of each party and defines the important terms of the arrangement.
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