Borrow money without the hassle of family and friends

It has now been a few weeks since the war between Russia and Ukraine started. To say the least, a terrible condition across the board. Everyone is wondering how this will continue, what else will happen and what the impact will be on society and the economy.

For example, we experience gigantic price increases of raw materials and deteriorated or even impossibilities to buy or sell products. In short, an economic uncertainty of great magnitude. Parties such as the Central Planning Bureau (CPB) and the European Central Bank (ECB) are still talking about economic growth, while the chairman of VNO-NCW expects a prolonged recession. Future visions of our economy with a short shelf life and meanwhile changing every day.

Be that as it may, even in this very special time we try to continue as best as possible and focus on development. In this article I will discuss borrowing money from a special group, namely your family.

Bank no longer wants
In recent decades, entrepreneurs, especially agricultural ones, have been able to develop their business partly because their bank made money available to them. They did this promptly, reasonably and with suitable interest and repayment terms. Since the credit crisis, some ten years ago, the rules surrounding banking have been tightened at an international level. The European governments and the ECB are increasingly imposing more and stricter requirements on banks. The result is that they make a high risk assessment, impose stricter conditions when making money available and in many cases the bank no longer wants to.

At the same time - even if you have already borrowed money - strict monitoring is carried out during the term of a loan. This means that if the company underperforms, the bank will impose far-reaching and additional requirements and/or measures in the interim.

Family or Friends
An entrepreneur who stands behind his plan and who can explain it will not give up, but will look for alternatives. One of these is the group of acquaintances and your business network, which are referred to in the finance world as family and friends† You talk to, explain what you intend to do and usually a decision from the potential lender follows quickly. Not infrequently, that decision is only partly based on facts and much more on us-know-us and above all mutual trust, perhaps too great, judged at times.

Drinking beer together
Of course, both parties think at the start that it cannot go wrong. Fortunately, experience shows that this is also the case in many cases, but not always. It is important to be positively critical at the beginning, so up front; good to discuss all matters and leave nothing out. It's not about emotions, friendship or drinking beer together, but about doing business and doing business. In our experience, people think too easy at the outset, little or nothing is laid down in writing and if things go differently, Leiden is in charge.

Boarding up
Provided, a family loan can be an excellent alternative and/or supplement. Here, just like with the bank or the leasing company, agreements must be made about the interest and repayment. In practice we often see that the repayment is limited and sometimes even repayment free. The result is a higher free cash flow, which provides additional development opportunities for the company.

It is possible that the lender requires security in the form of a right of mortgage on immovable property or right of pledge on movable property. It is important that you know whether you can actually provide this. It is possible that your bank has the first rights for this and that you must ask for permission in advance. In addition, the bank can demand that this loan is subordinated to the financing it has provided. This means that interest and/or repayment can only be paid after all obligations with the bank have been met. In that situation, the family loan risk is technically regarded as equity, which further strengthens the company.

An enterprising farmer sometimes has to borrow money and he wants as little bureaucracy, piles of paperwork and long lead times as possible, but quickly, smoothly and without hassle. That is fine with family and friends, but even there things must be tightly and completely arranged. Smart farmers understand this, organize it and continue with their business and with their business.

Farmers Funding & Advice unburdens you in the field of business administration, business economics, tax-legal matters and realizes the most suitable financing.

Peter Pals

Peter Pals is an entrepreneur at Farmers Funding & Advies and grew up on a farm. From his farming heart, he has decided to build up a business for business, financial and tax advice for agricultural entrepreneurs.