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My son wants me to lend him some money to start a business and I would like your opinion please.

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I fully appreciate and understand the fact that you wish to help out your family however I would like to point out some possible pitfalls so that you enter into the transaction with your eyes fully open before you lend your family any money. The main issue to be careful about is that you both need to have a clear understanding of the transaction. Nothing will tear a family apart quicker than issues over money and this is the first consideration.

I have witnessed people losing their homes after putting it up for a failed family business venture and unfortunately it is a common scenario that can occur when you lend your family money as unfortunately a new business venture may not always work.

You need to sit down and go over their current financial situation and see how they have budgeted for your interest repayments in the business plan and that you agree this a realistic plan for the future and that they have allowed for everything.

If you decide there is no other option then I would like to offer these tips to help protect yourself.

  • You should explore all other avenues before agreeing to lend the money.
  • Do not lend what you cannot afford to lose and ask yourself if you would be comfortable giving the money away as a gift? If the answer is no then you are probably not in a position to loan it
  • Be fully aware of the risks and ensure you enter the loan transaction with your eyes open.
  • Be aware of what the consequences could be further down the track with the worst case scenario being that you may never see the money again or if you have used your home as security for a loan in your son’s name you could lose it.
  • Importantly ensure you put everything in writing, seek independent legal advice and sign loan documentation that clearly states the term of the finance including a repayment plan.
  • You should also talk to your financial planner, Centrelink and the Australian Tax Office to see what effect if any this could have on your future tax obligations, income and pension.

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