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Family Business Loan Advice Needed Please

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  • Family Business Loan Advice Needed Please

    OK. So my father was left with a freehold house passed on from his mother after she passed, that he has put in a trust with Him and His Children (Me +++++)

    One of my brothers has sparked up an idea to my father on a business he wants to open up a shop which my father was easily sold on the idea.

    Option 1. Was to sell the house, and fund the project ourselves. Leaving a bit of money on the side for other projects like investing into properties using deposits individually.
    Option 2. We mortgage out on the house to the fund the business so we are still left with the house as an asset?

    My question about option 2. If we say, borrow 100k for the business, would that then mean that if we decide to borrow to get into property investments later or anything in that matter. we are unlikely to borrow more until the 100k is paid off years down the track?

    What is the better option of the 2 please, or what would you do as I would like to get into property investment while we have a freehold house? But dont have enough knowledge to try sell the idea to my father
    Last edited by Xplaya; 11-01-2017, 10:06 PM.

  • #2
    Mortgaging the house is likely the best option. The interest is tax deductible when the funds are used for business purposes. With a house as collateral, the interest rate should be much better, too.

    Be very, very aware and careful of such an arrangement involving family members. Despite the feeling that everyone should accept handshakes as the word or bond of those involved, the deal absolutely, unambiguously and implacably must be the subject of a legal agreement, despite the cost of that.

    Too many families have been torn apart by intra-family-financed business deals going bad.
    Last edited by Perry; 15-01-2017, 12:23 PM.

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    • #3
      Agree with Perry about the legal agreement. Also to add many businesses fail, often in the first couple of years.

      Is there any reason the house cannot be sold and the proceeds distributed. Then the brother can use his own money - and only his own money - for his shop.

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      • #4
        A SHOP?

        Going to mortgage his own house for a SHOP?

        Geez what a foolish idea that is.

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        • #5
          Originally posted by MichaelNZ View Post
          Geez what a foolish idea that is.
          Totally agree with MichaelNZ.

          I've witnessed this very thing in a family.... Two houses lost, destroyed the family in the process.

          Not a good idea to mortgage the house owned by the Family Trust to set up a shop. Do everything you can to prevent this from happening. If your brother wants to set up a shop, let him mortgage his own personal house. If this can't be done, then he goes without the shop.

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          • #6
            The #1 reason it's a foolish idea is because of the high failure rate of independent retail businesses.

            Whatever he wants to sell he should try selling it from home first to test the market.

            This is before we get to the others reasons why it's a bad idea... It's just the first one on the list.

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            • #7
              I run a home based business and this has surprisingly high expenses and hits on cashflow. My favorite example is the cost of a new set of toner cartridges for a colour laser printer. (About $1,200 - 1,300 for mine - a Kyocera)

              This sort of stuff can have quite a hit and it's also the sort of stuff people who are "green" (new) commonly underestimate or even overlook entirely.

              Here is the picture for my business:
              1. Tax - fully paid by end of November 2016 the amount due by 7th Feb 2017.
              2. ACC - fully paid
              3. Suppliers - nothing owed
              4. Stock - all paid for
              5. Assets - all owned and fully paid for

              If I have a lean month it's a pain in the butt but nothing I will lose sleep over and everyone still is paid.

              On the other hand - a shop carries a whole new set of expenses and problems every month. Have a lean month and the choice could well be whether to pay the tax man (or tax-woman as the case may be lol) or pay the rent. For too many small businesses it just snowballs from there.

              Twice my business had commercial space. Both times was a monthly lease with no personal guarantee. Despite that it was cheap 1st floor space it was still an extra drain...

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              • #8
                Thank You Everyone for the replies. From the start I have been skeptical of the "Shop" idea but could be a potential. Sadly my father is one of those guys that if it sounds too good to be true, he's in lol and well my brother could probably sell him a brick in a box as a phone if you know what i mean.

                I am all for selling and distributing out to family / funding the business idea as well. Just thought there may be something I am missing when it comes to mortgaging that I never thought about But after reading replies I feel this is the best option and thanks for the advice on the business side of things too MichaelNZ

                You may see a post in the next month about the best way to sell Its already under a real estate agent for renting anyway so we most likely go through them to sell as well.
                Last edited by Xplaya; 16-01-2017, 02:14 PM.

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                • #9
                  Originally posted by Xplaya View Post
                  From the start I have been skeptical of the "Shop" idea but could be a potential. Sadly my father is one of those guys that if it sounds too good to be true, he's in lol and well my brother could probably sell him a brick in a box as a phone if you know what i mean.
                  Then take your money and run. Seriously, shops are about the [redacted]est business you can imagine.

                  I have empathy for your position. While my situation is different, it's looking like I will also have to take my money and run. Sometimes it's simply a lot easier on your own.
                  Last edited by PTWhatAGreatForum; 16-01-2017, 02:18 PM.

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