Forums / Property Investing / Help Needed! / How much interest should I charge a famly member

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  • Profile photo of blackhotelblackhotel
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    @blackhotel
    Join Date: 2010
    Post Count: 139

    Hi,
    My brother wants me to loan him money so he can buy a business ($220K). The business is very sound and has been running for 40yrs. It will be an un-secured loan as he has no real estate to secure his own loan from a bank. I have asked a few finance savy people and there advice varies greatly with the rate. Some say up to 25% pa, which is a bit rich I reckon. Just trying to get other opinions on what others think is a fair and reasonable interest rate to charge him.  Thanks

    Profile photo of ParuwkaParuwka
    Member
    @paruwka
    Join Date: 2010
    Post Count: 1

    Hi, not really an answer to your question however, I have personal experience of loaning a family member (my brother) money. Sadly, we have a disagreement on how much should be repaid and how it should be repaid. My advice is to really thing hard about making this loan. The bank is basically saying …we don’t think this is a viable loan…so why should you? I suspect intra-family loans cause more grief than they are worth. If you do go ahead have a solicitor draw up the legal papers. And be prepared for unhappiness.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Extremely risky to buy a business. So the rate should be much higher than a secured loan.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of suavemechanicsuavemechanic
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    @suavemechanic
    Join Date: 2004
    Post Count: 106

    hi for family  i reckon at least a hundred percent ! ( up front if possible …..)
    while you and your brother are still friends i suggest you write up an agreement that explores a few worst case scenarios and features a time line for payments , and an impartial mediatior ( like yer mum) be nominated so that the agreement and the business can still work when you are no longer speaking….
    and while on the subject minimum standards for bookkeeping, personal grooming ,staff selection and any thing else that will cause you concern

    this should be a golden opportunity for families to work together and really help each other, i truly believe that
    sadly my recent experiences have had a 100% failure rate and if the bank wont lend then you are taking on a big responsabilty with a warning label attatched
    have you asked about vendor finance ? and old man finance company ?( try and share the debt round a bit ! )

    good luck and best wishes

    Profile photo of keikokeiko
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    @keiko
    Join Date: 2008
    Post Count: 513

    Hi Blackhotel,

    I have loaned my brother money for a business before and I made sure I was 50% director of the business and 100% owner of the sellable items, if they needed to be sold of, basicly he owned nothing, but he ran the business and earned a wage and made 50% profit at the end of each year, I got no wage because I did not work there but I did charge the items/business back on a hourly rate and monthy fee. eventually he was to buy me out but he thought I was charging to much and I had already made plenty of money and he should get the lot for nothing,LOL. so there for we had arguments, I did organise a bank to loan him the money and pay me out at cost but he decided he did not want the responibilities so I sold the business and walked away with a profit on the items and we both made money from the sale of the business.
    He should have bought me out at cost and he would be rolling in the dollars but instead the new owner is.
     
    Just because the bank will not loan him money that does not mean didly squat, the bank would not loan my brother money either, because they could not see how it would work and the person we bought it of had ill health and had let the business slip a little and he had bad financials, but that did not bother me because I new my brother could pull the business into track and if he failed I new I would put 100% into it and make it work.

    Trust me don't get your mum involved or either one of you will have a falling out with your mum.
    Now it depends on the type of business to how much interest you should charge, I did not charge interest as I did it a different way as above. It really does depend on a few things, like how much you could make from your money if you don't loan him it.
    I would have thought 10%-15% would be fair seen as its your brother.

    Now depending on how involved you want to be would be how I would be working it out and also can your brother run this type of business?
    If you don't want to be involved at all then just charge interest

    And watch out as you more than likely will have a falling out with your brother,
    best way to work this out is say here are my conditions 40% interest rate, you watch <delete several words – moderator> how grumpy he will be.

    I am not trying to put you off loaning him the money but make sure you lay out everything on the table know matter what it may be. and ask him to tell you everything he thinks even about the rate you will charge etc and what he will do if the business falls apart.
    Sought it all out before you do anything and ask heaps of questions, after all of this you will work out wheather you should proceed or pull out. and get a lawyer to draw up the papers. make sure he can run the business, and make sure the business financials are not cooked when buying the business.

    If you don't proceed I am more than happy to borrow the money at 10% p/a secured against property interest paid monthly.

    I hope everything helped

    Profile photo of blackhotelblackhotel
    Participant
    @blackhotel
    Join Date: 2010
    Post Count: 139

    Thanks everyone,
    The deal is that I actually have already loaned him the money 3 years ago, but his accountant is hassling me that I am charging 12% on the loan. The accountant says it's way above commercial rates. I beg to differ, so I just wanted to get other opinions on the matter.

    Just another thing, I loaned him the money $220K @ 12% and he pays $700pw (never missed a payment), do I declare this income on my tax returns yearly or do I wait until he has paid off the principal amount, then I declare the rest as income later on.  
    the reason i say this, if his business fails and he re-paid less than what i gave him, then technically I have earned nothing. Hope this makes sense!!!!

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    Blackhotel

    I think 12% is very reasonable. Probably on the low side. a personal loan secured by a car is around 12%, without security it would be much higher, around 16% +.

    I think you should try to take some form of security over the business. You can take a charge over the company or take mortgages over equipment etc. If you do this you may be able to take priority over other creditors if the business fails. If you don't you might miss out completely.

    as for the interest, you would have to declare it in the year you receive it. If he fails and you don't get your money back then there are special rules about writing off debts.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of blackhotelblackhotel
    Participant
    @blackhotel
    Join Date: 2010
    Post Count: 139

    great, thks for your help. 

    Profile photo of keikokeiko
    Participant
    @keiko
    Join Date: 2008
    Post Count: 513
    blackhotel wrote:
    Thanks everyone,
    The deal is that I actually have already loaned him the money 3 years ago, but his accountant is hassling me that I am charging 12% on the loan. The accountant says it's way above commercial rates. I beg to differ, so I just wanted to get other opinions on the matter.

    Just another thing, I loaned him the money $220K @ 12% and he pays $700pw (never missed a payment), do I declare this income on my tax returns yearly or do I wait until he has paid off the principal amount, then I declare the rest as income later on.  
    the reason i say this, if his business fails and he re-paid less than what i gave him, then technically I have earned nothing. Hope this makes sense!!!!

    Hi Blackhotel

    $220k @ 12% is $507.69 per week $26,400 p/a.
    $700 per week would be $36,400 p/a which is nearer to 17%?

    Profile photo of blackhotelblackhotel
    Participant
    @blackhotel
    Join Date: 2010
    Post Count: 139

    of course he is paying P& I. otherwise he will never pay it off!

    Profile photo of keikokeiko
    Participant
    @keiko
    Join Date: 2008
    Post Count: 513

    Thought that would be the case
    22 years and you should have the principal returned

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