Borrowing money from family for a business: how to do it without hurting anyone

“Mum and Dad said they’d lend us the money.” It’s one of the warmest sentences in small business, and one of the riskiest, because it usually arrives with no paperwork, no end date and no plan for a bad quarter. The money is real. The relationship it sits on is worth more.

Here’s how to decide between a family loan and a business loan, how to set a family loan up properly if you take it, and what a lender will think when it sees it later.

Should I take the family loan or get a business loan?

Start with the honest question: who can afford to lose this money? A business loan is a commercial arrangement with a lender whose job is to carry that risk. A family loan puts the risk on people who may be counting on that money for retirement, a granny flat or the next family emergency.

	Family loan	Business loan
Who carries the risk	Your relatives	A lender, usually with security
Paperwork	Whatever you write	Set by the lender
Flexibility	High, if everyone’s reasonable	Fixed by the contract
If the business struggles	Awkward family conversations	A formal process, but no Sunday lunch
Effect on the next lender	Counted as debt	Counted as debt

Neither is automatically better. A family loan makes sense when the amount is small enough that the family could lose it without being hurt, you can repay on a realistic schedule, and everyone has said the quiet part out loud. A business loan makes more sense when the amount is large for the family, they’d be using savings they’ll need, or you’d rather keep money and family separate.

Our borrow personally or through the business tool lays the structure options side by side if you’re unsure how the loan should be set up.

Is it a loan, a gift or a stake in the business?

This is the most important sentence to write down, and the one families skip. Three different things get called “help with the business”:

• A loan. The money is to be paid back, usually on set dates, sometimes with interest.
• A gift. It is not to be paid back. That can feel kind now and awkward later if siblings, a divorce or a will enter the picture.
• A share. Your family becomes part-owner and shares in profits and losses. That’s an equity deal, and it’s a different document altogether.

A loan with no repayment terms can start to look like a gift, and a gift with a vague promise to “pay it back one day” can turn into a dispute. Law firms in Australia warn about this regularly. If you’re not sure which one it is, that’s the conversation to have before any money moves.

What should a family loan agreement say?

It doesn’t need to be long. One page, signed and dated by both sides, covering:

1. The amount and the date it was paid.
2. Repayments: how much, how often and the final date. Avoid “repayable on demand” unless you really mean it.
3. Interest: yes or no, and if yes, how it’s worked out. Your accountant can help with a sensible figure.
4. Early repayment: allowed, and without penalty?
5. If you can’t pay: who you’ll tell, how soon and what happens next, such as a pause or a new schedule in writing.
6. Security: none, or exactly what and how it’s registered.
7. If someone dies, divorces or sells up: whether the loan is to be repaid and who inherits the right to it.

A solicitor can turn that into a proper agreement for a modest cost, and for a larger loan it’s worth doing. The point isn’t mistrust. It’s that two people’s memories of a handshake rarely match three years later.

Why “repayable on demand” can backfire

A loan that’s simply repayable on demand sounds flexible. Law firm commentary points out that for these loans the time limit for taking legal action can start when the money is advanced, generally six years in most states (Western Australia works differently, counting from the demand). A family lender can find the clock has run without anyone noticing. Codea’s article sets out the issue. Real repayment dates, and a written acknowledgement of the debt now and then, keep things clear for both sides.

Should my family take security?

Sometimes a parent asks to be “on the title” or to have first call on the business. Think carefully before agreeing.

If your family lender wants security over business assets, a security interest can be registered on the Personal Property Securities Register (PPSR). Registration matters because priority between lenders generally follows who registered first, so your family could end up ahead of, or behind, a bank or other lender later. Security over property is a different legal step again.

Two cautions:

• A later lender will check. A second lender looking at your business will search the PPSR and ask about any existing security. A family charge over everything can limit your options, or it may need to be rearranged or subordinated before a lender goes ahead.
• Security over your home is a bigger step. If a parent is putting their own home behind your business, that’s a guarantee, which is a different thing and worth independent legal advice. Our page on being asked to guarantee a family member’s business loan explains what’s at stake, and Moneysmart’s guarantor guide is a good second read.

If you’d like to see what the business could borrow without using family security at all, a 60-second enquiry is a low-key way to find out, and your credit file isn’t touched for asking.

How will a later lender read a family loan?

This is the part owners miss. A family loan is debt, even when it’s friendly debt. When you later apply for business finance, expect a lender to ask:

• how much is owing, and on what terms;
• what the monthly repayments are, because they come out of the same cash flow the new loan would depend on;
• whether the money was a loan or a gift (this is where a signed agreement saves you);
• whether the family lender would agree to be paid after the lender if things go wrong. This is sometimes called postponing or subordinating the debt.

What lenders really read is the business’s cash flow, so a family loan on gentle terms can help, while a family loan with big repayments squeezes the same cash that supports new borrowing. A short, signed agreement is far easier to explain than “Dad said we’d sort it out.” Our guide on questions to ask your accountant before you borrow is a good prompt list before any application.

What about tax?

Interest on money borrowed and used in the business is generally deductible, and a family member who receives interest generally includes it in their own income. How that plays out depends on whether you trade as a sole trader, partnership, company or trust, and on the terms you’ve agreed. The ATO’s deductions for business pages are the starting point. Confirm the detail with your accountant before you put an interest figure in writing.

A worked example

This is an illustration, not a real client.

Sam runs a small mobile coffee business with one van. A second van would cost $90k. Sam’s parents offer $90k from their savings, no paperwork. Sam’s accountant points out two things. The parents plan to use part of those savings for home repairs next year. And a $90k family loan with no dates would sit on Sam’s books as debt with unknown terms.

Instead, Sam takes a $30k family top-up under a one-page agreement with fixed monthly repayments over three years, and finances the rest of the van through a business loan in the business’s own name. The family’s exposure is a third of what they first offered. Sam also keeps the lender relationship clean and has a repayment record on the business itself.

Smaller family exposure, written terms and a proper lender for the bulk of the money: it’s a split plenty of owners end up preferring.

When a business loan is kinder to the family

A family loan is the wrong tool when:

• the amount is more than your family could comfortably lose;
• they’d need it back at short notice;
• the business is early, untested or already tight on cash;
• you’d be tempted to hide a bad month rather than tell them;
• the family would feel pressure to guarantee or secure it against their own home.

In those cases, a business-purpose loan puts the risk where it belongs. Depending on what the business needs, that might be an unsecured or cash-flow loan, typically $5,000 to $500,000 and sized on your turnover, or a property-secured loan from $20,000 to $5,000,000. Our page on protecting the family home covers the questions to ask about any security. If you and a partner are doing this together, couples in business money rules is worth a read first.

A short checklist before you accept

1. Decide: loan, gift or share. Write it in the first line.
2. Agree amount, dates, interest and early repayment.
3. Check the family can afford to lose it, and say so aloud.
4. Decide whether any security is on offer, and take advice before it is.
5. Tell your accountant how it’s being recorded.
6. Put the repayments in your cash flow forecast, not “when we can”.
7. Agree what you’ll do if you can’t pay, and who you’ll tell first.

Family help is a good start. Here’s how to see what else is possible

Having people who believe in you enough to put money in is a gift of its own, and it deserves a plan that protects them as much as the business. Sometimes that plan includes a family top-up. Sometimes it’s a business loan in the business’s own name, so the family gets to stay family.

If you’d like to know what the business could borrow on its own feet, we can help you find out. The enquiry takes about 60 seconds and there’s no credit check when you first enquire, so asking won’t affect your credit score. We don’t send your details to a pile of lenders, so your phone won’t light up with strangers. A real person reads your situation, including a family loan you might already have, and calls you to talk it through. Please fill the form in accurately, including what’s already owed, so the first option we suggest is the right fit.

See what your business could borrow →