Talking Cents

Melbourne small business accountant discussing silent partners

Some people may not necessarily want to be hands on in a small business but they see the potential of a small business or its owner and decide to invest in the business, becoming what we know as a “silent partner.”

For the hands on business owners there can be many ramifications of having a silent partner watching over your shoulder and requiring their debt to be repaid. Such silent partners do not feel the pressure of the day to day cash flow management issues and other hands on matters such as dealing with troublesome customers. This is why it is essential that a formal loan agreement be put in place with agreement from solicitors from both sides.

It is essential that both parties understand and expect the debt to be repaid in a realistic time frame. Putting undue pressure for early payment of the loan will only harm the businesses cash flow and further risk the chances of not recovering the loan at all. At the same time, the hands on business operator needs to understand and respect the needs of their silent partner.

From the very outset a cash flow and periodic budget must be drawn up that factors in repayment of the debt as per the agreement drawn up by the solicitors. No matter what the relationship is between active business owners and silent business partners a handshake agreement or a letter drawn up by the two parties without legal representation is just asking for trouble, especially in the situations where businesses suffer from poor cash flow and debt repayments become the first outgoing to be put on hold.

So we aren’t advocating that silent partners not be used to fund your new small business, but we have seen such relationships turn sour, so it is essential that proper legal contracts to register the debt be drawn up along with a timetable for repayment of the debt. If you think it’s not needed or you can’t afford to have legal counsel involved then you may well be better off finding a different way of funding your new small business. The risks of trouble are far too high and can be painful for both sides. For more small business news and tips contact mas accountants, the original accountants for small business.