Business Ownership Tips: Preparing For The Unexpected

Planning for sudden roadblocks is crucial to the success of your business.

As a business owner, it seems like an impossible task– how do you expect the unknown and plan for challenges that can’t be foreseen? You know any sudden hurdle that needs to be overcome has to be met with enough strategy and confidence to get you through it, but where does that come from?

It’s all a matter of preparing for the worst when it comes to your entrepreneurial success. You’ve got to prevent circumstances from becoming overwhelming and keep the business running along smoothly even as each new problem rears its head.

By Mary Juetten

Protecting your physical property shouldn’t be just a matter of the right insurance policy. Chances are you have things far more valuable than a desk that occupy your office space, things that should be even more zealously guarded than the bricks and mortar that physically manifest your company. Many companies have drawings and prototypes kept on site, and possibly sensitive data that is stored on a local server or an air-gapped device — valuable objects and information that can’t be replaced with a check from the insurance company.

Keeping your most valuable information and IP protected against physical damage or destruction requires extra measures that can go unconsidered in many cases. Safes might be thought of as an anachronism in an age where anything and everything is going digital, but secure physical copies of sensitive information guard against potential loss if local data is damaged in a disaster. And while on-site data storage can seem like a more prudent option to the security-concerned, it faces the same potential risks as everything else you keep in your office; cloud storage, if handled securely, can offer equivalent or possibly better security in a monitored off-site facility, eliminating concerns about disaster recovery.

Perhaps most important to preventing business failure in the event of a disaster is keeping thorough records on purchases, transactions, and all of the business you conduct and storing them securely. Having to rely on memory and guesswork to piece together contract terms or the price of expenditures will inevitably lead to mistakes, and could leave your business on unsure footing. Much of what we do is already digital, but for those things still on paper, creating digital copies to upload to the cloud is a smart way to create a complete record that is safe against damage.

While we can’t plan when disasters will hit, or schedule them during down periods when the pain of recovery isn’t as excruciating, we can prepare against the day when the worst might happen so that we’re back on our feet as quickly as possible. #onwards.

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Should You Accept A Business Loan From A Family Member?

It’s a tricky subject— here’s how to navigate.

If you’re a small business owner in the market for a business loan, you have most likely already talked to your local bank or other small business lender. And no matter how affordable the loan options, one option is consistently appealing: Borrowing from a friend or family member.

You might have wealthy family members or friends who are happy to cut you a check with no conditions or stipulations, but there are more factors to take into consideration when borrowing from someone you know, other than just how much they can lend you. Here’s a rundown of what you should consider and how to best navigate the situation.

By Jared Hecht

You’re More Likely To Be Approved
Let’s state the obvious: A family member likely won’t put you through the same vetting and underwriting process that a bank or lender will insist upon. Though diligent investor-types may ask to review your business plan and check your business credit history, they will hardly hold you to the same stringent standards that most lenders have.

Typically, to get approved by a bank, you need strong business and personal credit scores. You’ll also need to have been in business for a few years—the longer the better. And the underwriting process can take weeks or months as the lender reviews your existing debts, cash flow, and other factors.

One of the appeals of a family loan is that they’ll be more likely to “approve” you, and quickly, due to your personal connection. If you have less-than-stellar credit or are the owner of a new business, a loan from family may be your best way (though not the only way) to get capital fast.

You’ll Probably Receive Generous Terms
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—the SBA 7(a), considered one of the best loans a small business can qualify for—has an interest rate starting at 7.75%.

The amount of money you need, the interest rate you can afford, the time period you need to pay the loan back—all of this can be hashed out with your family in a way that makes the most sense for you.

Loans from traditional lenders may also offer you affordable terms, but they will always be advantageous to the lender, which is trying to maximize their take from the transaction.

Debt Or Equity: Which Do You Prefer?
Taking out a loan is known as debt financing: You go into debt in order to fund your business, then pay that debt back on a predetermined schedule.

Another form of financing is equity financing: You take on funding as an investment, just as you might from an angel investor or venture capitalist. From then on, your family member will be a financial partner in your business and may expect to have a say in business decisions.

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.

You’ll Still Need To Formalize The Loan
Here’s where things get tricky. You might be tempted to keep things informal with your loan from a family member. Why get bogged down in paperwork and logistics when they can just hand over the money, and you can hand it back—as promised—bit by bit?

There are both legal and logistical reasons that you’ll want to create formal documents for a business loan, even one between siblings or from parent to child:

  • Ensures financial responsibility: By borrowing money for your business from family, you’re taking advantage of an opportunity that isn’t available to many business owners. Learn and engage in financial responsibility by making a business plan for the exact amount of money you need, and a payment schedule that you stick to no matter what. Then, when the time comes for a loan from an outside lender, you’ll be ready.
  • Takes nobody, or their money, for granted: Lacking formal documents gives you wiggle room to submit late payments or neglect your responsibilities, creating discontent. You would not be the first person to have a falling out with a family member over money. By creating formal terms that you uphold, you’ll signal to your family that you see them as legitimate creditors and/or investors that you respect.
  • Helps avoid tax issues: We’ll go into more detail below, but if your loan from a family member is for a substantial sum of money, understand that the IRS will get involved, whether you like it or not.

Your loan agreement should outline, at a minimum: The amount of money changing hands; a repayment schedule; interest payments; whether the loan is secured with collateral or unsecured; and the role the investor will play, if any, in business decisions.

You can convene with an accountant, legal professional, or third-party service to help draw up the formal structure of your loan and ensure that both sides do their part to uphold it.

Even A Family Loan Has Tax Implications
As mentioned above, there are tax implications to most business loans you take on, even if they’re via family.

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.

If your family member wants to charge you interest, it can’t be for a wildly under-market interest rate (anything below 1.78%, according to TurboTax). An interest rate of fair market value helps prove that this is a legitimate business loan.

If your family member is fine with extending you a no-interest loan, it needs to be for less than $100,000. Anything more, the IRS will charge the lender imputed interest, taxing them as if they were receiving interest on your loan.

In addition, a formal loan document will help your lender write off the loss if the business doesn’t end up working out.

You’ll Have To Balance The Personal With The Professional
This final point has been the throughline of much of this article, but it bears repeating: Taking on a loan from a family member means mixing your business and personal lives.

For some people, that’s okay: They feel confident they can balance the needs and egos of their family members in exchange for working capital. Others may not enjoy this process and might consider keeping everything professional by sticking with a third-party lender.

If you do take out a loan from a family member, best practices include keeping your lender appraised of how the business is doing—so there are no surprises—and, of course, keeping up your end of your formal agreement.

A loan from a family member can be a unique opportunity to grow or scale your business with affordable, flexible financing. It can also be the first step in a long line of financial decisions that hamper not just your small business, but your familial relationships.

As with any loan, do your research and speak to your advisors before taking on such a large financial and personal responsibility. Just because it’s family doesn’t mean it will be easy—in fact, in some ways it might be even harder on you than repaying a traditional loan.

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