Using the bank of mum and dad for business funding

In this piece, we look at the ways in which parents can benefit from injecting cash into their offspring's business.

The bank is often the first port for call small companies go to when seeking business funding, but could there be a solution closer to home.

Other start-ups may use crowdfunding or even the Enterprise Investment Scheme, but are small businesses missing out on the untapped wealth of the Bank of Mum and Dad.

Research by insurer Legal & General claims the Bank of Mum & Dad, where homebuyers borrow money from their parents to get on the property ladder, is now worth £5 billion.

The research finds parents will help finance 25 per cent of mortgage transactions this year at an average amount of £17,500.

That amount of cash could go a long way for a small business. Getting money from a family member is also likely to be a quicker process and hopefully you will be charged very little or nothing at all for the credit.

So what could you offer the Bank of Mum and Dad in return?

A place on the board

It is often said that with age comes wisdom. Your parents could offer their skills or experience to help your business grow.

You could reward them for their investment by giving them a place on the board or making them a director.

Equity for business funding

If you were going to raise money through crowdfunding or enterprise investment schemes you would have to give up equity in your business.

Rather than giving up a stake in your enterprise to a total stranger, why not get your family involved.

You could make your mum or dad a shareholder in your company and pay them dividends in return for their investment.

This could also be a good way of spreading your income as you could make use of two people’s £5,000 allowance, meaning you could earn £10,000 before paying any tax.

Beat the banks

With interest rates at record lows there are very poor returns from savings products.

Rather than their cash sitting in the bank being eaten away by inflation, your parents could put their money to work by backing you.

If you make a decent profit, the likely dividends you could pay in return or any interest you may choose to repay could be much higher than a savings account.

Tax planning

There are tax benefits for parents giving money to their children.

Parents can gift up to £3,000 to their children in each tax year, but this applies to all children. The allowance can be carried over from one year to the next but the maximum is £6,000.

Anything above this amount would count towards your £325,000 inheritance tax threshold if the parent making the gift dies within seven years of giving you the money.

Chris Conway, managing director of Accounts and Legal says, ‘Whilst there are a plethora of weird and wonderful ways of funding your business they are nearly all dependant on the entrepreneur’s ability to communicate their business idea fully to a funder.

‘New entrepreneurs often get caught up in the business idea itself without providing the research and evidence to support their assumptions of how the idea with convert into future financial performance. ‘Prior preparation prevents poor performance’ as the saying goes.’

Further reading on business funding

Ways to fund business growth for a small company

Related Topics

Funding

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