Literally ” money of love “, this term comes from the United States.
Born in 1960, this technique meets a fundamental need for any entrepreneur: the financing of his company. In France, Love Money has been encouraged by the public authorities since 2000. It allows the relatives of an entrepreneur to lend him money to carry out his project .
Love Money is also known as “3F: Friends, Family and Fools” . Translated literally by “friends, family and enthusiasts” , this formula refers to the 3 types of people who will be likely to finance a start-up business. The Love Money is therefore based on trust, and the proximity between the 3F and the entrepreneur (e).
When to use Love Money?
Love Money is usually legitimate when the entrepreneur is in the business creation phase. The 3Fs are then an excellent resource to obtain financing and start a business. The Love Money is also often intended to finance the first expenses of the company : Research and development, constitution of the stock, need for working capital, furniture, etc.
But with the advent of crowdfunding, Love Money now intervenes in several phases and not necessarily only at the start of the business ! This “fundraising” in Love Money legitimizes even more the use of crowdlending. The company is already started, solid, visible and it lacks the crowdlending to allow him to raise more money to develop .
As stated in the article on the 5 ways to promote its crowdlending campaign, the nearby Love Money circle becomes the first relay and financier of this crowdlending campaign .
What are the advantages & disadvantages for the lender and the borrower
Love Money has a lot of advantages. Entrepreneurs can build capital , which banks may not have allowed, or at rates much higher than those in love money.
Love Money gives credibility to the entrepreneur looking for funding . Through this practice, the entrepreneur can test his idea, validate his business model or modify it accordingly, communicate about his company and attract potential financiers.
Also, the Love Money reassures the banking infrastructures : If the entourage and the close of the entrepreneur lend their money and believe in the project, the bank will be in full capacity to say that the project deserves attention and interest. A company that has built its capital through Love Money proves that it has convinced its relatives, perhaps the most difficult thing when starting a business.
Some precautions are however to be taken: The relationship between the lender and the borrower must be clearly defined legally and personally to avoid any problem. It is often recommended to accept the funds of his 3F only if they consciously accept to lose them. However, these sums committed by the 3F are framed and thus protected of which:
- The right to examine at any time the annual accounts , the reports of the board of directors , the reports of general meetings , the reports of the auditor if there is one and the list and object of the current agreements concluded between society and its leaders.
- The right to withdraw from society at no extra cost thanks to the signing of a “Love Money Good Conduct Pact”
- The right to convene the general meeting for each 3F that brings together at least 5% of the company’s share capital.
Taxation and legislation of Love Money
This part only concerns investment in equity:
Currently, two laws participate in the development and encourage the practice of Love Money Equity: The TEPA law and the Madelin law. These two laws allow individuals to invest directly with small businesses and SMEs and benefit from substantial tax exemptions when a person or a couple wants to invest in the capital of small and medium-sized businesses.
- The reduction on the ISF : If the lender invests in the capital of one or more SMEs through Love Money, the reduction of its ISF is -50% of the investment made. At most, the lender can save 45,000 euros.
- The reduction on income tax : If the lender invests in the capital of one or more SMEs through Love Money, the reduction of its income tax will be 18% of the investment made. At most, the lender can save 9000 euros for a single person, and 18 000 euros for a married couple. For these two cases, the minimum investment period to qualify for the tax benefit is 5 years.
Also, if the company in which the financiers have invested is declared in default of payment within 8 years of its constitution, they have the possibility of benefiting from a deduction of taxes equal to the amount of their subscription. The maximum for this deduction is 30 500 euros per year for a married couple, and 15 250 euros for a single person.
In conclusion, Love Money is a real alternative to traditional loans and bank loans : Calling on family or friends is a challenge and sometimes a difficult task, but it pays off and is credible. Paying, because this confidence allows to advance more easily in the entrepreneurial adventure. And credible with future investors, who will see the strength of a project funded by Love Money very quickly.