Loaning money to a startup
Discussion
Hi,
A friend has a startup and needs some capital to give cash flow for first year. If I give them a simple loan with interest repayment, from what I can gather from googling, that would be declared as Income not capital gains.. although clearly there is an element of risk here!
A) Am I correct that interest payments would be taxed as income?
B) If so, are there simple & better ways to structure 1yr cash flow to have the funds treated under capital gains (and therefore also be able to offset any loss)?
Thanks for any pointers.
A friend has a startup and needs some capital to give cash flow for first year. If I give them a simple loan with interest repayment, from what I can gather from googling, that would be declared as Income not capital gains.. although clearly there is an element of risk here!
A) Am I correct that interest payments would be taxed as income?
B) If so, are there simple & better ways to structure 1yr cash flow to have the funds treated under capital gains (and therefore also be able to offset any loss)?
Thanks for any pointers.
p4cks said:
You could ask for some equity?
I’m looking to get a “relatively” risk free return on capital as they are trusted friends, I don’t really want to tie cash up in equity, unless there was a simple way of using equity (potentially with a guaranteed buy back in a year) as a way of getting capital gain return on a loan, I’m guessing not but figured here is a good place to ask!!matrignano said:
Normally lending to a pre-revenue startup would be done in the form of a convertible note, but clearly you would need someone to structure it for you, which might be costly…
And if I receive a return on money lent in the note, how would that be taxed?I’ve also now gone down a SEIS rabbit hole. I have both income and cgt I could use to cover an investment rather than a loan, but at a 36% post rebate cost!
Everyone likes to help their friends, but sometimes when you mix friends and money it’s possible to end up losing both if it goes wrong.
If this is their first startup (and your first investment in similar) you need to all go into it with a clear view of timeline (usually much longer than people expect), costs (usually higher than many will initially estimate), and how you get your money back in a planned manner and, if it’s a meaningful sum, if you might need it suddenly for other purposes.
As has been said, convertibles are often used for startup funding, but also consider the extent to which share classes can be used to allow you to exit first if there is a future liquidity event. Tax treatment would depend on whether it converted and timescales etc.
If you do anything with equity, remember that the other side isn’t “giving away” a slice of their business and don’t forget to take into account future dilution.
If this is their first startup (and your first investment in similar) you need to all go into it with a clear view of timeline (usually much longer than people expect), costs (usually higher than many will initially estimate), and how you get your money back in a planned manner and, if it’s a meaningful sum, if you might need it suddenly for other purposes.
As has been said, convertibles are often used for startup funding, but also consider the extent to which share classes can be used to allow you to exit first if there is a future liquidity event. Tax treatment would depend on whether it converted and timescales etc.
If you do anything with equity, remember that the other side isn’t “giving away” a slice of their business and don’t forget to take into account future dilution.
I’m happy with the risk profile of losing a loan, but to understand how to price my risk I need to understand how return on a loan would be taxed.
It looks like I could get near 2/3 relief on SEIS to invest, which is actually also interesting, but I’m firstly thinking about a simple repayment loan with interest as this is specifically excluded from SEIS from what I can see!
It looks like I could get near 2/3 relief on SEIS to invest, which is actually also interesting, but I’m firstly thinking about a simple repayment loan with interest as this is specifically excluded from SEIS from what I can see!
Silly as this sounds.. check out the deals that are structured on deals done in Dragons Den / Shark Tank.
Almost all of them are either straight equity swaps for cash.. or loans where there is a payback period, but also significant equity.
As mentioned above, you'd be taking a huge capital risk for a couple of interest points... You should ask for (and receive) equity for your risk.
Almost all of them are either straight equity swaps for cash.. or loans where there is a payback period, but also significant equity.
As mentioned above, you'd be taking a huge capital risk for a couple of interest points... You should ask for (and receive) equity for your risk.
I’m happy with the risk profile for #reasons, but I need to price the risk correctly.
Can anyone confirm if I’m correct in saying interest received would be treated as income not capital gain? And if so, is there any sensible way to structure as capital gain as the equations are quite different if so!
Thanks all
Can anyone confirm if I’m correct in saying interest received would be treated as income not capital gain? And if so, is there any sensible way to structure as capital gain as the equations are quite different if so!
Thanks all
No first hand knowledge here but could your friend explore using a P2P lending wrapper?
https://community.hmrc.gov.uk/customerforums/sa/a9...
If you are married and your spouse happens to be a non or basic rate taxpayer, she could be the lender and her income tax exposure may be less than yours…
https://community.hmrc.gov.uk/customerforums/sa/a9...
If you are married and your spouse happens to be a non or basic rate taxpayer, she could be the lender and her income tax exposure may be less than yours…
stuthe
said:
said: Hi,
A friend has a startup and needs some capital to give cash flow for first year. If I give them a simple loan with interest repayment, from what I can gather from googling, that would be declared as Income not capital gains.. although clearly there is an element of risk here!
A) Am I correct that interest payments would be taxed as income?
B) If so, are there simple & better ways to structure 1yr cash flow to have the funds treated under capital gains (and therefore also be able to offset any loss)?
Thanks for any pointers.
The interest would be taxed as income and the cost of the workaround would most likely exceed the tax owed unless you are talking very considerable sums. A friend has a startup and needs some capital to give cash flow for first year. If I give them a simple loan with interest repayment, from what I can gather from googling, that would be declared as Income not capital gains.. although clearly there is an element of risk here!
A) Am I correct that interest payments would be taxed as income?
B) If so, are there simple & better ways to structure 1yr cash flow to have the funds treated under capital gains (and therefore also be able to offset any loss)?
Thanks for any pointers.
Now for the boring bit:
Don't lend. The correct interest rate for the risk will be crippling to the business. That's why they can't borrow from legitimate sources and are needing to resort to sourcing a lender who will massively miscalculate the interest rate in their favour.
If they really are good friends then you wouldn't jeopardise that friendship by lending money. And if they aren't really good friends then ot obviously makes sense to lose them now by not giving them your money versus losing them in two years time plus your money.
Something that doesn't make sense is that you said your friend has a start-up and needs to capital to give cash flow in Yr 1? So he has set up a business and not put his money together for even its first year? That would be a massive clown alert.
Anyway, it sounds like a complete disaster already and one that you'll throw yourself into for no material upside and lose your money and friends but if you do want to do this then either just give them the money as it's obviously money you can afford to lose and they're good friends or charge them the correct interest rate for the total loss risk that you would be taking and release the funds in instalments with the checking of the books prior to each instalment being made. And add your tax liability to your charge to them.
stuthe said:
said: Thanks for the reply Donkeyapple. I just sent you an email with a bit more info/colour
Got it. Have some thoughts and will put them in an email response. The numbers do warrant paying for some work. Can you give me the morning as I'm in the middle of fitting a new kitchen and some basic trigonometry is currently frying my brain!! 
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