Loans From Family To Cover Payroll

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Loans From Family To Cover Payroll

Many business gurus will tell you about the amazing feats you can accomplish as an entrepreneur, but they will not always tell you about the enormous responsibilities it entails. By running your own business, you are taking on the responsibility of maintaining staff. Even if your company only employs one person, you still owe it to them to provide the same benefits every pay period.

This responsibility also brings about a few important questions. For example, what happens if my clients don’t make prompt payments? What should I do if I need money for payroll? Finally, should I borrow money from family to help pay my staff?

In today’s guide, we will answer all of these questions and more related to borrowing money from family. But first, let’s look at the advantages and disadvantages of getting loans from family to cover payroll.

Advantages Of Borrowing Money From Family

If your business is in a tight financial position and you are unsure where to find the funds to pay employee salaries, borrowing money from family is a legitimate option. Depending on your situation, the pros might outweigh the cons. In any case, here are a few of the major advantages of borrowing money from family:

Low-Interest Payments

Generally, if you are borrowing money from one or more family members, it means that you’re on good terms with the lender. In other words, you will likely get a “family rate” with an interest rate that is far lower than any bank could offer. If your family trusts you to pay them back promptly, they may not ask for any interest payments at all (see more about that in the tax implications section below).

Greater Repayment Flexibility

One major advantage of borrowing from your family is the flexibility to pay back the loan at your own pace. For example, if you miss a payment on a bank loan, you will likely incur steep fees. If you miss multiple payments, the remainder of the loan could be sent to collections. Depending on what you use for collateral, you could even lose assets vital to your business. Alternatively, family members will usually give you much more wiggle room to make payments on a schedule that works for you.

No Credit Check Required

In addition to the aforementioned benefits, acquiring loans from family to cover payroll generally negates the need for a credit check. This is especially beneficial if you have poor credit. Rather than turning to a bank that could either refuse to lend you money or charge a high interest rate, you can avoid the issue of credit entirely by borrowing from family.

Disadvantages Of Borrowing Money From Family

Obtaining a loan from family may seem like the easiest, most cost-effective option, but it also comes with some important disadvantages. Though family loans have both pros and cons, the negative aspects may be substantial enough to make you look elsewhere for funds. So, let’s take a look at some of the major disadvantages of acquiring loans from family to cover payroll:

Strained Relationships

Many people will tell you not to mix family and business — and for good reason. Using family as a source of finance for your business can lead to uncomfortable situations. For example, you may expect your family to lend you money without an interest rate. If your family offers you a loan with a standard interest rate, you may feel as though they are being greedy. Alternatively, if you fail to make a payment, your family may get frustrated and ask for their money back. This is by far the biggest disadvantage of borrowing money from family.

Limited Accountability

Borrowing from a lending institution comes with various legal and contractual protections for both the lender and the borrower. Unfortunately, borrowing from family is generally kept “off the books,” so to speak. You may only have a verbal agreement, which means that the lender has less incentive to provide the cash in a timely manner. Similarly, you (the borrower) might stop making payments, which could force the family to take you to court.

Awkward Power Dynamics

How you feel about borrowing money from family might depend on the family member who acts as the lender. For example, borrowing cash from your parents may be more comfortable than asking your brother-in-law or sister-in-law for a loan. In any case, whenever you borrow money from family, it introduces an uncomfortable shift in power dynamics. The borrower can always hold the loan over your head, even after you have paid everything back.

Tax Implications Of Loans To Family Members

In addition to the disadvantages of obtaining loans from family to cover payroll, it is also important to take note of the tax implications. As previously mentioned, many family members treat a loan to another family member as a casual occurrence. In other words, they may not record the terms of the loan in writing or charge a minimum interest rate. However, the IRS treats loans and gifts very differently.

If you or your family fail to keep diligent records or fail to set a minimum interest rate, you could have a confusing situation come tax season. By failing to set it up as a proper loan you could open yourself up to unwanted scrutiny from the IRS. This might even lead to an audit, which would likely require additional costs.

Fortunately, you can avoid these issues by following the same standards as a traditional lending institution. The terms of the loan should set a minimum interest rate that follows the guidelines set by the Applicable Federal Rates (AFR). In doing so, you will greatly reduce the risk of breaking any IRS rules. If you prefer to treat the loan as a gift, you will need to account for the maximum gift amount set by the IRS (currently $15,000 per recipient, per year).

The Payroll Funding Solution

As you can see, getting loans from family to cover payroll is not always the perfect solution. In fact, family loans for your business can be downright risky. Even if you ignore the interpersonal drawbacks, a family loan does not provide enough legal protection to justify risking the future of your business. For this reason, it is best to look to a payroll funding company to help with your payroll needs.

Why choose a payroll funding company? Because a payroll financing solution is specifically designed to provide small and medium-sized businesses with short-term loans to cover payroll costs. Rather than taking out a high-interest small business loan or MCA loan, use a payroll funding loan to get the money you need now — at a much lower cost to you.

Fortunately, payroll financing is fast, affordable, and secure. With payroll funding, you get immediate access to cash. Most payroll financing loans are designed to be paid off quickly, allowing you to use delayed payments from clients to repay your loan as soon as possible, saving you even more on interest costs. This way, you can access the cash you need to pay your workforce without getting tied down by a high-interest bank loan or a complicated family loan.

We hope you found this guide on loans from family to cover payroll useful! If you’re interested in learning more about the advantages of payroll funding, feel free to reach out to Payro Finance today!

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Morris Reichman
hello@payrofinance.com

Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.

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