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But there are more factors to take into consideration when borrowing from family than just how much they can lend you—especially if they don’t want to act as your piggy bank. You’ll have to consider tax implications, the lender’s expected ROI or role in your business, and what to do if there’s a change in your business’s outlook.
On a related note, it’s likely that one of the reasons you’re considering a loan from a family member is that they’re willing to give you terms no bank would. Even the most popular SBA loan—, considered one of the best loans a small business can qualify for—has an interest rate starting at 7.75%. It will be up to you to decide which kind of funding you prefer. If your family member is an experienced business owner, you might appreciate bringing them into the decision-making process and having their advice and input. On the other hand, you may prefer to keep your autonomy, limiting your family’s involvement to this particular infusion of capital.Here’s where things get tricky. You might be tempted to keep things informal with your loan from a family member.
A verbal or otherwise informal agreement may seem easier than writing up a formal loan document, but not where the IRS is concerned. If your family member loans you over $13,000 and the IRS views it as a gift because there was no intention to repay it, they will become subject to federal gift tax rules and will be required to pay taxes on that money.