Important notice

Although the content of this article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.

Getting Started

Borrowing from friends and family

When entrepreneurs look to friends and family for investment, what are the benefits and challenges of mixing the personal and the professional?

Borrowing from friends and family

You can always count on your best man. From organising the stag do to adjusting your tie at the aisle. But investing in your start up business? That was the experience of Nick Farnsworth founder of toy business Little Sport Star when seeking investment to move online.

“We launched in 2012 and through a US licensing partner our products such as baby golf clubs were in huge retail stores,” Nick explains. “Unfortunately, the partner didn’t spot the online opportunity. I did but needed investment.”

Because the firm did not have an established online presence it struggled to get a bank loan. “I made a list of friends and family who might have the money,” he explains. “My best man had business experience so, despite feeling awkward, we discussed it over a beer.”

He invested £100,000 under the Enterprise Investment Scheme (EIS) tax relief programme and took an equity stake. 

Informal approach

One study, from peer-to-peer lender Thin Cats found that 1.6 million people have lent money – average £4,479 – to a friend or family member to help grow their business.1

Entrepreneurs benefit because friends and family are unlikely to demand high levels of interest, want limited security and often offer flexible repayment terms. Decisions are quicker because of less due diligence.

This informal approach can, however, create problems. If friends and family aren’t fully aware of the risks and lose money it can sour relationships.

“You may not be at a stage where you can raise thousands from people you don’t know but you can raise it from those you do,” says Anthony Rose, founder of SeedLegals.

“In the past you may have felt embarrassed in case the venture failed but thanks to Seed Enterprise Investment Scheme (SEIS) and EIS tax relief, those investors can deduct 50% (for SEIS) or 30% (for EIS) of that investment from their taxable income that tax year or the previous year, pay no capital gains tax when they sell the shares after three years, or write off their investment if things go wrong. It reduces the risk of them never talking to you again over Christmas dinner.”

Anthony says a friends and family investment often follows an initial bootstrapping process. “Normally an investor won’t give you cash straight off a pitch, so you have to put some of your own money in first,” he says. “Our data shows founders spend a median of £26,000 of their own money before they seek external investment.”


Bootstrapping, or funding your business yourself, gives time and space to build your design, marketing and communications. But it also means a lack of regular income and often seeing savings dry up.

Kate Bell, founder of maternity wear firm Zip Us In, is a former bootstrapper. “When we began in 2014, we had a lady in a garage with a sewing machine making small batches. We pulled whatever money we had into materials,” she explains. “We then sealed a deal with Boots and needed investment to manufacture at scale. We had gone through our savings.”

She looked for a bank loan but with only one year’s trading no offers emerged. “We went to family. They believed in what we were doing and because of the Boots order there wasn’t a huge investment risk,” she explains.

The result was a £25,000 loan from her parents at a 0.6% per month interest rate. “Payments were made as and when cash was available,” she says.  

Formal agreements

It is vital entrepreneurs create formal loan and shareholder agreements to avoid costly and emotional disputes. Nick took legal advice around the equity split. “It was the only time we negotiated against each other which proved difficult. But with a formal agreement in place we have firmly been on the same side,” he says. 

He is clear on the benefits. “If you have friends who invest then you don’t need to dedicate too much time to fundraising,” he says. “In addition, as I did not want to lose my friendship, I was more upfront about the risks. I was painfully transparent with no ambiguous answers to any questions he asked. That’s continued in the business as I don’t hesitate to share any bad news.” 

Kate shares strategy with her father. “He used to run his own business so has been my go-to to bounce ideas off. He is emotionally willing you to succeed,” she explains. Most mums and dads won’t be so clued up but may be as willing to give advice.

Anthony urges caution. “Amateur advisors overplay their opinions, so separate the roles of investor and advisor,” he says. In the end apart from business growth, success is judged on whether close relationships remain.

Kate has no concerns. “I felt some personal guilt and cut back on personal spending like holidays,” she says. “But when it works, we all benefit.”

Nick adds: “By separating the personal and the business our friendship is as strong as ever.”



The information in this brochure is based on our current interpretation of the law and HMRC practice.

The levels and bases of taxation, and reliefs from taxation, are generally dependent on individual circumstances.

Taxation legislation and HMRC practice may be subject to unforeseen changes in the future.