Your son's finally doing it. After years of talking about starting his own business, 2025 is the year he's making it happen. Or maybe it's your daughter's cafe that's taking off, but she needs capital to buy stock in bulk. Perhaps it's your mate who's launching a tradie business and needs equipment.

They need $15,000-30,000 to get going or to take the next step. The bank's said "come back in 12 months" because they want to see trading history. But you can see the potential. You've got the money. You're ready to help.

Lending money for a business is fundamentally different from helping with a house deposit or university costs. The risks are higher, the documentation needs to be tighter, and you need to protect yourself properly.

Why Business Loans Are Different

When you lend money for a house, there's usually property to secure the loan against. When you help with uni, it's a relatively small amount over a short period.

But business lending? That's another level entirely.

The Statistics Aren't Pretty
According to the Ministry of Business, Innovation and Employment, roughly 50% of New Zealand businesses fail within their first five years. That doesn't mean your child's or mate's business will fail, but it does mean you need to plan for that possibility.

The Amounts Are Usually Larger
A typical business startup loan from family might be:

• $20,000-40,000 for equipment and initial stock

• $15,000-25,000 for a work vehicle

• $10,000-30,000 for working capital to cover the first few months

These aren't small amounts. For many New Zealanders approaching or in retirement, that represents a significant chunk of their savings.

The Repayment Timeline Is Uncertain
Unlike a university loan where you know they'll graduate and start earning in three to four years, business cash flow is unpredictable. Some months will be great, others lean. You need to plan for variable repayments.

The Conversation You Need to Have Before Handing Over Money

Before you agree to lend money for a business, sit down and have an honest conversation about these questions:

1. What's the Business Plan?

You don't need a 50-page document, but you do need to understand:

• What's the business model?

• Who are the customers?

• How will revenue be generated?

• What are the realistic timelines?

If they can't explain their business clearly, that's a red flag. You're not being difficult, you're being sensible.

2. What Other Funding Have They Explored?

Have they:

• Applied for bank lending (and why were they declined)?

• Looked at business grants or government support?

• Considered bringing in other investors?

• Tried to bootstrap with personal savings first?

If you're the first port of call without exploring other options, that's worth questioning. It'll also give you an idea of who is first in line, should things go south.

3. What's Their Skin in the Game?

Are they:

• Investing their own money?

• Keeping their day job initially?

• Starting small and proving the concept?

The best business loans to family are ones where the borrower has already demonstrated commitment and has something to lose if it fails.

4. How Will You Be Repaid?

This is where it gets specific:

• Fixed monthly amount regardless of revenue?

• Percentage of monthly revenue?

• Balloon payment after a set period?

• No payments for X months while they establish, then regular payments?

There's no single right answer, but you need an answer that's documented.

5. What Happens If the Business Fails?

Nobody wants to think about this, but it's crucial:

• Do they still owe you the money personally?

• Is there equipment that could be sold to repay you?

• What's the priority order if other creditors are involved?

• Are you prepared to write off some or all of it?

Having this conversation before the business starts is much easier than having it when the business is struggling.

Structuring Your Business Loan Properly

A business loan agreement needs more detail than a simple personal loan. Here's what to include:

Essential Terms

1. Loan Purpose
"This loan is for the purchase of business equipment, specifically: [list items]" or "This loan is for working capital to cover business expenses from [date] to [date]."

Being specific protects you both. If they need more money later for a different purpose, that's a separate conversation.

2. Loan Amount and Drawdown
Will you provide:

• The full amount upfront?

• Staged payments as milestones are reached?

• A line of credit they can draw on as needed?

3. Repayment Terms
For business loans, consider:

Option A: Grace Period + Fixed Payments
"No repayments for the first 6 months. From month 7, $500/month for 48 months."

Option B: Percentage of Revenue
"Borrower will pay 5% of gross monthly revenue, minimum $200/month, maximum $800/month."

Option C: Quarterly Lump Sums
"Borrower will pay $3,000 per quarter, with the option to defer one payment per year if revenue is under $20,000 that quarter."

4. Interest Rate
Many parents don't charge interest to family. But for business loans, charging even a nominal interest rate (2-4%) makes it very clear this is a genuine commercial loan, not a gift. This matters for:

• Tax purposes (both yours and theirs)

• IRD if they ever get audited

• The business's accountant

• Other investors or lenders down the track

5. Security (If Applicable)
Will the loan be secured against:

• Specific business equipment?

• The business vehicle?

• Personal assets of the borrower?

If you're secured against equipment worth $30,000 and the business fails, at least you can sell the equipment to recoup some of your loan.

6. Business Performance Reporting
Consider requiring:

• Quarterly revenue updates

• Annual financial statements

• Notification if they bring in other investors

• Notification if the business structure changes

You're not trying to micromanage, but you have a right to know if your money is at serious risk.

The Tax and Accounting Complications

When you lend money for business purposes, there are additional considerations:

For You (The Lender)

• Interest received is taxable income

• You may need to deduct Resident Withholding Tax (RWT)

• Keep detailed records of payments received

• If the business fails and you write off the debt, there may be tax implications

For Them (The Borrower)

• Interest paid may be tax deductible for the business

• The loan appears on their business balance sheet

• Their accountant needs to know about it

• Other lenders (if they get them) will want to see your loan agreement

Key Point: Make sure their accountant knows about your loan from day one. A verbal agreement won't cut it for IRD or bank purposes.

When to Say No (Even If It Hurts)

Sometimes the most loving thing you can do is refuse to lend the money. Consider saying no if:

• You can't afford to lose it: If losing this money would materially impact your retirement or financial security, don't lend it

• They have no business experience: Starting a business is hard enough. Starting one with borrowed family money and no experience is a recipe for disaster

• The business plan doesn't make sense: If you can't understand how they'll make money, that's a problem

• They're resistant to documentation: If they're offended by you wanting a proper agreement, they're not ready for the responsibility

• Your relationship is already strained: Money and business problems will only make it worse

Alternative Options to Consider

Instead of a straight loan, consider:

1. A Smaller Amount

Instead of $30,000, lend $10,000 to help them start small and prove the concept first. If it works, you can lend more later.

2. Equity Investment

Instead of a loan, buy a percentage of the business. This aligns your interests. You both want it to succeed. But get proper legal and accounting advice first.

3. Guarantee Instead of Direct Loan

Some parents guarantee a portion of a bank loan rather than lending directly. This gives the bank confidence while potentially giving you better legal protections if things go wrong.

4. Gift + Loan Combination

Gift a small amount (say $5,000) for initial setup costs, then loan a larger amount for equipment. This shows support while maintaining clear boundaries.

Real Scenario: The Equipment Loan

The Situation
Your son is starting a landscaping business. He needs:

• A ute: $25,000

• Equipment (mower, tools, etc.): $8,000

• Working capital: $7,000
  Total: $40,000

The bank won't lend to him yet, he needs 6-12 months of trading history first. He's kept his part-time job to cover living expenses while he builds the business.

The Smart Structure

Loan 1: Equipment Loan - $33,000

• Secured against the ute and equipment

• 0% interest for first year, 3% after that

• No repayments for 6 months

• Then $600/month for 60 months

• If business fails, you can sell the ute and equipment

Loan 2: Working Capital - $7,000

• Unsecured

• 0% interest

• Repayable when he secures bank lending (expected within 12 months)

• If not repaid within 24 months, converts to monthly payments of $200

Why This Works

• The secured loan protects most of your capital

• The working capital loan has a clear exit strategy

• Repayments are realistic for a starting business

• You're not putting all your retirement savings at risk

• It's all documented properly

The Mate's Business Loan: Extra Considerations

Lending to a friend's business adds complexity:

Different Relationship Dynamics

• The relationship is more transactional than with your child

• There may be less room for flexibility if things go wrong

• Your expectations might be higher

Higher Standards of Documentation
Even if you're mates, treat this as a commercial transaction:

• More detailed agreement

• Consider using a lawyer for review

• Security is even more important

• Set clear consequences for non-payment

The Friendship Risk
Be honest with yourself: If this business fails and you lose your money, can the friendship survive? If the answer is "probably not," you shouldn't lend the money.

Your Business Loan Checklist

Before lending money for business purposes:

✓ Review their business plan in detail
✓ Understand why banks won't lend (and whether that's a red flag)
✓ Confirm how much of their own money they're investing
✓ Discuss realistic repayment scenarios
✓ Agree on what happens if the business fails
✓ Decide whether you want security over assets
✓ Set reporting requirements (quarterly updates, etc.)
✓ Determine interest rate (even if it's 0%)
✓ Put everything in a written agreement
✓ Inform their accountant about the loan
✓ Keep detailed records of all payments
✓ Review the arrangement annually

When the Bank Finally Says Yes

One often-overlooked aspect: What happens when your child or mate finally qualifies for bank lending?

Your loan agreement should address:

• Will they use bank funds to repay you?

• Or will they keep both loans running?

• Can they refinance your loan into their bank lending?

Having this conversation upfront prevents confusion later when they're trying to negotiate with the bank.

The Hard Truth About Business Failure

Let's be honest: There's a real chance the business won't work out. And if it doesn't, having a proper loan agreement gives you options:

If It's Your Child
You might choose to:

• Convert the loan to a gift

• Extend the repayment period indefinitely

• Accept partial repayment

• Write it off entirely

But at least you'll have records for your other children and for your estate planning.

If It's Your Mate
You're more likely to want repayment even if the business failed. A proper agreement gives you:

• Legal recourse if needed

• Security over equipment you can sell

• A bad debt deduction for tax purposes

The Bottom Line

Lending money for business purposes is high-risk, even when it's family or close friends. That's exactly why it needs to be documented properly.

A written agreement:

• Protects both parties

• Sets clear expectations

• Gives you security if things go wrong

• Helps them take the loan seriously

• Makes tax and accounting easier

• Prevents relationship damage

If someone is truly ready to run a business, they'll understand why you need this in writing. If they're offended by the idea of documentation, they're not ready for the responsibility of running a business.

Help them succeed, but protect yourself in the process.

Ready to create your business loan agreement? Amico creates legally binding, IRD-compliant loan agreements in minutes. Set clear terms, protect your capital, and help someone build their dream without risking your retirement.

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