What is it? How does it work?

Literally “love money” in English, Love Money achieves a goal: to provide a way for a loved one (friend or relative) that we believe will start the adventure of creating a business. Also known as “3F”, for Friends, Family and crazy, literally friends, family and enthusiasts, Love Money responds to a specific logic that involves intimacy and trust.

Love Money, what?

Love Money is a financial alternative to traditional loans provided by banks. For the creator, the attraction of the Love of Money consists of the loved ones are involved financially to establish or develop his business. This financial participation is formal: relatives become shareholders of the company. Often, the purpose of this investment is more emotional than we are. In other words, relatives invest to help the maker start or grow an existing business and not to make money. Sometimes even “family lenders” can lose their down payment …

So it is risky to invest in the sense that the creator is often a novice and his business may not function. This financial risk associated with the fact of the nature of the investment can make relatives hesitant, or at least, create tension (or even resentment!) Within the family itself. This is especially true if the borrower asks his parents (father and mother) in the presence of siblings. Siblings may feel aggrieved about the inheritance.

Love Money, for whom, for what?

Love Money is generally used in the context of raising the share capital of a creation company (crowdfunding), but can also, if necessary, be used in the context of a recapitalization after the launch of the company.

In the first case, the Love of Money solution essentially addresses two types of creator profiles:

  • creators who have difficulty getting a bank loan and who do not want to bring partners outside the circle of relatives

  • holders of “small” projects, that is, projects that do not require a significant personal contribution.

In the second case, the Love of Money solution is primarily aimed at young companies that have experienced rapid growth and therefore find themselves running out of money, or companies that need more. capital contribution to enable the launch of a new product, a research and development action, an international launch, and so on.

In both cases, the Love of Money makes it possible strengthening a social capital that is relatively weak, which provides leverage. In fact, banks are more likely to lend to a working capital company than a company with a limited share capital.

Love Money, how does it work?

Love Money is part of the classic fundraising framework. Potential funders are required to present a structured project. So a detailed business plan is made by the creator. This supports the request.

Loans granted are usually given in return for shares of share capital, the proportion of which is calculated based on contributions. So the relative became a shareholder of the company. If activity improves, the investment can be profitable. Conversely, if the activity does not disappear and generates losses, the investor may lose his first bet.

To set up Love Money financing, there are two main solutions:

  1. Although the creator directly contacted his relatives, presented his project to them and tried to convince them to share the creative adventure by injecting personal funds.

  2. Even the creator presents his project on a crowdfunding site and encourages his relatives to participate through the online platform. This second solution may be interesting because it makes it possible to broaden the profile of potential investors (family, friends, but also third parties).

In all cases, the relatives approached have all the interest in formalizing the debts granted. Why? Simply because they can benefit from significant tax exemptions!

In detail, the legislature prosecutor urges individuals to invest in VSE and SME in two counts:

  • Wealth tax reduction : Article 16 of the TEPA law of 21 August 2007 creates a solidarity tax reduction on wealth when there is investment in unlisted SMEs. This reduction is 50% of the amounts invested and is limited to € 45,000. This reduction is provided for direct capital investment by qualified SMEs. Securities subscribed with SME capital must be kept until December 31 of the 5th year after subscription. On the other hand, these securities cannot be redeemed (through a reduction in capital, for example) before January 1 of the 11th year after subscription. If these conditions during the stay are not respected, then the ISF reduction will be continued with additional penalties.

  • Income tax reduction (Madelin tax reduction) : Taxpayers who subscribe to the capital of an unlisted company, at the time of creation or on the occasion of the increase in capital, benefit from the tax reduction under the conditions. The securities must be held at least until December 31 of the fifth year after subscription and the purchase of the securities must not increase the fee before the end of the seventh year after subscription. The tax deduction is reversed if the investor does not keep his securities for the minimum period required. All SMEs under seven years of age are eligible, but the company must employ at least two employees by the end of the first financial year after subscription (or only one if it is a craft activity). The amount of tax deduction provided in this context is equivalent to 18% of the payments made annually at the time of reference, payments taken within the limit of 50,000 euros (single person) or 100,000 euros (married or PACS couple) . ).

To note: The two tax benefits (IR and ISF) can be combined, but are required to make two separate subscriptions and two separate payments.

Love of Money, the advantages and disadvantages for the maker

Proximity, speed, confidence, the advantages of using Love Money for the creator can be summed up in these three words. In detail, Love Money is based on a close relationship between the maker and his financiers Love Money. It’s about relatives: family and friends primarily. For these relatives, the decision to contribute or not to the capital is always quick, which speeds up the process of seeking financing. The trust of the creator and his project governs the commitment of the funders. This trust can be used as a seed to raise additional funds from a bank or from individuals as part of a Crowdfunding action.

In terms of disadvantages, the fact of calling relatives to embark on the adventure of creation is weighty. a risk to the financiers. The worker may be tempted to be too optimistic about his or her chances of success and suddenly, relatives may lose their down payment. This can lead to conflict between the producer and relatives. Drafting company association articles must address these risks of hidden conflicts. Implementing a written document that formally governs relationships between different stakeholders is more than recommended.

Another drawback for the creator: The Love of Money by definition is composed of limited amount. Relatives usually have only a few collections to inject into the project. So it is necessaryFind additional sources of funding to complete the budget.

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