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chriSmesS
09-17-2013, 10:45 AM
Three partners and I have agreed to open a business together and we will all be putting in equal start-up funding. I have gotten my parents to agree to help me with my portion of the start-up money by taking out a mortgage on our investment duplex. Additionally, we are going for a SBA loan for the business to help with start-up asset purchases. The SBA has asked for a repayment plan between my parents and I. I was wondering if there are any legal issues I need to know about in my parent's giving me a loan on a loan. For example, do they have to charge me more interest than the bank is charging them? If so how much more? Is there a maximum grace period they can give me before I start paying them back?

Thank you for any answers.

Chris

Business Attorney
09-17-2013, 06:00 PM
They are required to charge a minimum interest rate called the AFR. The AFR changes monthly and is divided into 3 types of loans: short term mid-term and long term. The rate also varies according to the compounding period (monthly, quarterly, semi-annually or annually). The rates are fairly low. As long as your parents charge you the correct minimum rate, the fact that it is lower than the interest they are paying makes no difference.

There is no specific rule when payments need to start but you will need to provide that interest accrues from Day One, so while you are making no payments, you are running up interest.

ArcSine
09-22-2013, 01:11 PM
Chris, one other subtle issue to be aware of; not a problem per se, just a little tax return item that's nonintuitive and thus frequently mis-handled.

To the extent the annual interest expense on the duplex loan is allocable to the loan proceeds they re-lend to you for the biz start-up, it should be treated on their return not as rental property interest, but as investment interest.

As long as they make sure their tax return preparer is aware of how the loan proceeds were used, s/he will treat it correctly.

Best of success with the new business!

phanio
09-27-2013, 02:01 PM
Why make your parent's loan a loan? Why not allow them to invest directly in the business or allow them a portion of your share of the business - thus it is not a loan and does not have to be treated as one.

smallbizfinancier
01-08-2015, 06:48 PM
They can gift you money each year as well. Not sure the amount allowed, however. It may be only $10K.

Try getting with an estate planning attorney. This is basic stuff for them and they could make you the trustee of their living trust; allowing you to manage their wealth and you could also be paid an income to manage. Since I'm not a barrister in the States, the due diligence rests on your shoulders.

Timmons
01-26-2015, 04:01 AM
Because his parents would be the investor, rather than him. He does not have the money, but his partners do.