Expert: Gina Boykin - 3/21/2008

Question
Hi Gina,

I hope im not wasting your time with this question but i cant find any answers online. My question is in connection to the small business i am starting up. I have a loan from the bank but need some additonal funds and some friends and family mentioned that they have some money to put up. They dont know my industry and wouldnt be involved with the company except for putting the money in. Would they be considered investors then? and how would that work? I know I will need to contact my lawyer to fine tune things but what sort of return would they could they generally expect? What sort of shares and say would they have in the company etc. Is there other options for paying them back without them being invested etc?

Thanks I appreciate any help you may have to offer!

Answer
The simplest way for them to contribute to your business is to loan you the money.  You can use a simple promissory note (which should be notarized) that allows you use of the money for a certain period of time, and you can either structure it so that you give them payments (monthly, quarterly, annually) over that period or all at once.  This will be no different than if you borrowed money from a bank.  You will need to designate an interest rate, which can be as low or as high as you agree upon.

If they are investors in the company, I assume you would pay them a portion of your earnings, so if you pay them interest instead, they should agree to this (and it will be easier for them to understand).

When you do your financial statements, this is where the real difference will show up.  Since your business has borrowed money, you will have debt (a liability) on your financials.  If they had contributed as investors, it would be equity.  This could make a difference if you need to apply for a loan later with the bank, because they will want to see how much your business already owes - just as they do when you apply for a personal credit card or loan.

I believe that Suze Orman has a form you can use for loans on her website at www.suzeorman.com (click on "resource center")