Bridge Loan from Relative with Verbal Agreement Only
To buy a capital investment and build inventory, a family member wrote a $3,000 personal check to my company. We verbally agreed on terms of 1 year at 10% interest with monthly payments.
My question is, should we sign an agreement stating the terms and conditions? What are the advantages/benefits to a written agreement? Will I need the agreement to write off the interest? What are the accounting and legal considerations?
If a bridge loan type agreement is recommended, where do I find a template?
3 Answers
The way I would do it:
- Make a resolution for your S corp or whatever to approve a loan at some terms
- Write a simple loan agreement that states the terms you mentioned and both sign it
- report the loan interest on company end of year statement
I don't really see any downsides to documenting it. I see lots of possible problems for failing to document it.
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+1 on the last two sentences – Jason 14 years ago
Taking money from a family as it is not the best idea in the world, doing it based on a verbal agreement is a disaster waiting to happen. What's wrong with the banks? Can't you get a better deal than 10% these days? Dealing with the bank is easier than with relatives most of the time. Remember, they're still training employees that "customer is always right". Unless of course it isthe same withing your own family... Good luck.
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+1 -- usually the advantage of family is that there's no interest or it's seed money. – Jason 14 years ago
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Clearly this is not the case here... I fail to see any benefits of this deal. – Usabilitest 14 years ago
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No guarantees, fast, lower interest rate (10% may be below what a bank charges). I once gve a friend a similar loan for a year. I got a little more money than the bank gave me, and he saved o interest, an there was no ridiulous paperwork involved (guaranteeesetc.), just a short signed note about amount, interest, repay plan. – Net Tecture 13 years ago
Put it in writing. It's always best to document this type of thing even if it's from family. If you ever have to get more money or want to sell your company, you will need to disclose this loan anyway.
Nolo Press should have a template for a bridge loan. They are pretty simple documents. All you need is the amount, term and interest rate. Then both of you sign it and that should be good enough.
