Using Family and Friends to Fund Your Coffee Shop Business

Starting a coffee shop will require substantial financial investment. One of the best sources of start-up capital can be from family and friends. You already have a close relationship with them, which is a great advantage and in some circumstances much more likely to provide you with the money you need than going to your bank or applying for a grant.

Often, start-up finance from family and friends is lent with goodwill as no legal documents are drawn up, or interest charged on the loan. You do, however, have to take into consideration a number of specific requirements before you accept any investment from your friends or family to fund your new coffee shop business.

Tax and Income

The conditions of the money you receive from family and friends must be looked at closely. If your loan is given interest free you don't have to account for this for tax purposes. However, if interest is charged you can claim the interest as a legitimate business expense, but you must also make it known to your family member or friend that the interest they receive from you for their loan must be declared as this income is taxable.

If you decide to sell shares in your business to family and friends and pay them a dividend at anytime in the future, again this is taxable income that they must declare. You must also keep detailed records of your share issue. Note that dividend payments are not a deductible business expense.

Family and Friends

There are clearly a number of advantages and benefits to asking family and friends to invest in your business. This include:

• Your loan will often be unsecured.
• More flexibility is available for repayments.
• If security is required, this will often be much more favourable than a loan from a bank.
• Expertise and knowledge may also be available that you can tap into.
• Interest may not be charged, and if it is, this will often be much lower than commercial rates.
• A detailed business plan is less likely to be needed.

You must also be aware of possible disadvantages of using financing from family and friends. These include:

• Relationships can be damaged when family and friends work together. This is especially true if your business ultimately fails and they lose their money.
• The terms of the loan or investment are misunderstood leading to friction within family or groups of friends.
• The loan may be demanded back at any time.
• The friend of family member may insist on getting involved in your business when you don't want this.

Family Finance Agreements

It's a good idea to approach any financial support from family and friends as if it was a loan from your bank. Use this checklist to ensure you have an agreement in place that enable you to start your business, but also maintain your relationship for your friends and family:

1: Written agreement
Even though you may think that an informal agreement is a good idea, it's advisable to draw up a letter of agreement that sets out the terms of your loan or investment. You can locate a solicitor to help you prepare an agreement on the Law Society website.

2: Business plan
Use your business plan to show your investor what their money will be used for. Make it very clear what they are investing in to avoid any confuse later that could result in them demanding their money back.

3: Tax and liabilities
As your investor will not know about the tax implications of investing in your business, make these points very clear to them to avoid any problems with tax at a later date.

4: Interest and dividends
If your loan will have interest attached to it ensure you and your investor agree the interest level and the repayment schedule. If you are selling shares in your business, clearly state the dividend that will be paid and when this is likely to happen.

Family and friends can be a great source of financing for your business. You should, though, approach any loan or investment that they make with the same caution as any other form of financing. It's important that both parties understand the details of the loan or investment to avoid any confusion. If you do have friends or family that want to invest in your business this can, not only boost your bank balance, but also your confidence.

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