Many of the world’s great businesses started with family money. Virgin Records owes its existence to a loan from Richard Branson’s Auntie Joyce. Mark Zuckerberg’s Facebook empire is said to have started with a $100,000 loan from his father. The list of such loans is long, and it may be getting longer.

According to the Centre for Entrepreneurs, today’s youth launch twice as many businesses as the baby boomer generation did. Last year a record 900,000 companies were started in the UK. These included 82,000 new online retailers and 21,000 new takeaway and street food stalls. 

Cautionary tale

Sadly, many of these will fail. My friend David Molian at Cranfield School of Management told me a story recently about a retired businessman — let’s call him “Richard” — who had risen to head up the US subsidiary of a well-known UK firm. 

A son from his first marriage fancied his abilities as an entrepreneur, and Richard backed his new e-commerce venture with an injection of £100,000 in the form of equity, giving him a substantial minority shareholding. The start-up began well, but within 18 months faltered and ran low on cash. 

Richard pumped in a further £150,000 in loans. His second wife was less than happy. Richard’s son made some unwise decisions. Three years later the business was declared insolvent. Creditors and shareholders received nothing.

“[The father] had spent a lifetime as a careful steward of corporate assets. His son saw himself as a buccaneering risk-taker. It took a long time to heal the personal rupture caused by the business failure,” says Molian.

Thinking like a banker

Wanting to give your kids a helping hand is only natural: lots of parents want to help their children on to the property ladder; many will have paid for the private education, too. Investing in a child’s business can be a tougher ask, though. Thinking like a professional banker can help. 

If you’re facing such a request, ask to see a business plan. It will give you a sense of the scale of your child’s ambition, and might even excite you. Writing up their research on the proposition, the market opportunity and the costings can encourage them to think through the challenges more thoroughly. 

Research shows that if you are an entrepreneur your children are 60 per cent more likely to be entrepreneurial. If you have business experience you can give valuable advice at this start-up stage. This assumes your children are prepared to take it on board – a big assumption perhaps!

One of the biggest mistakes the Bank of Mum and Dad makes is not to be clear about the terms of the financial arrangement. Is this a gift or a loan? If it is a loan, how much is it? What are the repayment terms? What is the interest rate? And what happens in the event of a default? Will there be any assets to claim against if the business fails?

Written agreements

Draft a written agreement that sets out the loan conditions. If it’s a big loan, don’t be afraid to enlist the assistance of a solicitor. Should the business fail, as many do, a formal legal agreement could help ensure you are recognised as a creditor. 

Research suggests that default rates for unmanaged loans between family and friends drop significantly if a signed agreement is in place with a monthly payment plan and automated electronic bank payments. 

Your child may ask you to “invest”, as Richard’s did. As with any equity investment there is a need to establish a return expectation. How and when will you realise a profit? Will there be a dividend or growth in the value of your share? A written agreement is even more necessary in this scenario because others may co-invest later as the business grows (hopefully), diluting your initial shareholding. You need a clear sense of your position. 

And, while you may just only be getting over the shock of the initial sum, consider how far you are willing to go beyond that first investment. Business angels have a rule of thumb: when you make an investment set aside the same amount again as contingency. Over-optimistic company founders almost invariably return for more money.

IHT planning

If your money is a gift you might consider it part of your inheritance planning strategy. Many clients tell us they have given a cash advance to one child and need to equalise the inheritance — often by carving that figure out of the will so that their other children do not feel hard done by. 

There are other ways to help your child’s business venture besides handing over cash. The loan of a garage, for example, free accommodation, or your time. I know one retired father who helped his son launch an electronic game — producing, packing and posting items, and working out the search algorithms to earn a “best buy” spot on the Amazon site. 

And, while it was hard work, it brought the father and son closer together.   

Be warned: it can go the other way. You can become an unpaid labourer. Time has value. As with any financial loan or gift, be clear about the terms and limits. 

Prudent giving

Most importantly, ensure you can afford whatever you give — be it money or time. Remember, the more sacrificial this is for you, the greater the risk of you feeling upset if you feel it is not appreciated or squandered.  

It can be infuriating if you are going short on luxuries to support your child’s venture and then discover them spending money on what you consider to be non-essentials. Similarly, it can be painful for your son or daughter if they feel they are working really hard and every time they want to relax and spoil themselves you are scowling in the background.

Ultimately, no two families are alike and emotions can run high. Being a branch manager of the Bank of Mum and Dad is not an easy job. A more formal approach may take some of the emotion out of the equation for some families. For others, it might heighten it. 

Yes, there is risk in supporting the next generation of entrepreneurs through the tough stages of business start-up and growth. But many businesses do succeed, and nothing can make most parents prouder than the thought that they have played a role in that success. Entrepreneurs always remember those who put trust in them at the journey’s start.

Shirley Coe is a senior private banker at Weatherbys Private Bank  

*Featured on the Financial Times website on 6th June 2024: Beware the Bank of Mum and Dad’s grey areas.

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There is high demand from a large number of buyers chasing a few properties. Homes are selling faster than ever before, taking on average 33 days to sell rather than 67 in 2019.² This intense competition may be deterring some owners from putting their homes up for sale.

Reports from estate agents on the ground suggest there is an increasing number of cash buyers and a growing number using bridging loans. Indeed, around a quarter of buyers using bridging loans to purchase a property are those looking to fund a ‘chain break’. In other words, they are wanting to buy a property before they sell an existing home.³

What is a bridging loan?

Bridging loans can prove a useful tool for people looking for a temporary solution to their funding needs. Not only are they used for chain breaks, but they are also commonly used for investment property purposes. Previously, these loans have often been an expensive solution to a tantalising problem. However, at Weatherbys, our short-term loans are no more expensive than our longer-term facilities and we work with you to tailor the loan that’s right for you without imposing punitive or unfair terms. And age is no barrier.

Homeowners, including those aged over 70, can obtain a bridging loan with interest charged at 2.59% per annum plus the Bank of England base rate – giving a current cost of 3.59% per annum – with a 1% arrangement fee.

Bridging loans can also prove advantageous for owners of valuable homes who intend to release substantial sums – and where professional investment and wealth advice will be needed in any event. There is a short-term finance option which is even more competitively priced for borrowers who sign up for the Weatherbys Investment and Wealth Advice service with at least £500k of the surplus proceeds from the eventual sale of their existing home.

Using a bridging loan to downsize

With house prices standing at record highs, it could leave many homeowners who are thinking of downsizing sitting on substantial but unrealised gains. Again, bridging loans could be a solution.

For example, for many older homeowners wishing to move, the immediate problem is how to unlock the wealth they have accumulated in bricks and mortar at the price they want or expect. This is where bridging loans can help them to span that gap and buy the property they want to enjoy in retirement.

Bridging loans are only a temporary solution – usually lasting less than 12 months – and are certainly not for everyone, but in challenging market conditions, and with the right advice, they can prove to be a flexible and useful solution.

How Weatherbys can help with your borrowing needs

We can help you with all your borrowing needs – whether for you, your children, or your grandchildren. We specialise in arranging short- to medium-term mortgages and loans secured against residential property, spanning owner-occupied and buy-to-let property.

We look at all aspects of your financial life, at all stages of your life. Rather than relying on the rigidity of credit scoring, we look at the full picture of your finances to make a pragmatic, informed decision. We give equal consideration to all our mortgage and loan applicants (over 18 years old) regardless of your residency status or whether you hold investments with us. Unlike many lenders, we will consider applications from borrowers over the age of 70 and take assets into account such as investments, guarantees or land.

When you apply for a mortgage or loan with us, in addition to personal attention from our Private Banking team, you can expect:

• a quick decision on your application
• stress-free arrangement from start to finish
• easy access to the people who make the decisions
• clear, simple communication to keep you up to date
• us to work directly with surveyors and lawyers on your behalf

Sources:

¹ ONS, ² Rightmove, ³ Bridging Trends

Important information:

Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured against it.

Borrowing money against your investment portfolio has its risks and is not suitable for everyone. If the market value of your pledged securities declines below required levels, you may be required to pay down your loan or pledge additional eligible securities in order to maintain it, or we may require the sale of some or all of your pledged securities. The sale of your pledged securities may cause you to suffer adverse tax consequences. We recommend you consult your independent financial adviser or your Weatherbys Investment Manager before applying for lending against an investment portfolio.

Our mortgages and loans are subject to underwriting and criteria. You must be 18 years or over to apply for a mortgage or other loan secured on your property. Terms and conditions apply.

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