What is a fair interest percentage to pay on a recurring loan from a friend?
I have a good friend who knows and trusts me. He is willing to put a lump sum in an interest-bearing account and allow me to borrow from it periodically to fund inventory purchases as my business is going through a rapid growth phase. My inventory purchases are against existing orders from highly credit-worthy customers. In other words, I'm "good for the money" and my friend knows it. I was looking for advice on what interest rate to pay and if I should cover his tax burden on the interest payments. I was thinking of paying 6-8% on the money I borrow from the fund plus whatever his yearly tax burden is for the earnings he gets. Everything will have a written and legal guarantee on the money.
Thoughts or comments? Is my interest rate paid out reasonable? This money he is contributing is not earning much of anything right now, so he's coming out ahead.
That sounds like a solid arrangement. For comparison, alternative lenders sometimes charge over 15 percent interest on a loan. As for your friend, six to eight percent sounds reasonable, although it's important you get his or her input before proposing anything. So long as everything is in writing and has a legal guarantee, it sounds like you have a good arrangement set up. If you're worried about not paying enough interest (as a thank you to your friend), address this with them. If you're asking if six to eight percent is too much, it's below what many alternative lenders will ask for and on-par with many bank loans. SBA loans are usually lower -- closer to 4 percent -- but that can be tied to special circumstances like disaster relief. If the interest rate works for you and your friend, I say go for it. Good luck to you and your business.