Legal Advice On Whether To Lend Money To A Friend’s Business (2025 Updated)

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So your friend has asked you to lend them some money for their business. What do you do?

A lot of people would tell you to steer clear.

It’s true – lending money to friends and family can present some serious risks, both financially and emotionally. In today’s fast‑moving 2025 financial landscape, even more factors come into play before you decide to offer a loan.

That doesn’t mean it’s never a good idea, though!

There are, however, several extra considerations to make when deciding whether to lend money to a friend’s business, including current market conditions and updated legal requirements.

Why Are They Asking You?

When a friend approaches you for money, it’s important to ask why they’ve chosen you. This question can raise some immediate red flags.

For instance, did they get rejected for a bank loan? In 2025, traditional lenders and fintech platforms alike are tightening their criteria, so if a bank has already deemed the loan too risky, it suggests the business might score high on the risk scale.

Or, perhaps the business already has a bank loan yet still needs additional funds. If they’re already juggling substantial debt, that in itself is a warning sign. Moreover, if your repayments are competing with the bank’s, your loan might always take a back seat.

You certainly don’t want your repayments to be delayed or even halted because your loan isn’t being treated as a priority.

Why Are You Considering It?

The next key question is, why are you considering reading this article? You’re seriously thinking about lending money to a friend – but what’s driving that decision?

Is it because you believe they have a genuinely good business idea and you want to invest? Have you carefully reviewed their financial records, business plan, and market potential? If so, you might even consider acquiring equity rather than providing a straight loan – a strategy often more suited to high‑risk investments. You can learn more about making secure agreements in our What Is a Contract? guide.

But if your motivation leans more towards an emotional response – perhaps you feel compelled to help because the business is struggling, or you feel guilty saying no – it’s wise to proceed with extreme caution. Making financial decisions based purely on emotion can lead to complications down the track, affecting both your finances and your friendship.

What Will You Agree On?

If you do decide to go ahead with the loan, the next step is to decide on the terms you’re comfortable with. Your friend might ask for a lower interest rate or a longer repayment period as a favour, but it’s crucial to treat the arrangement as a commercial deal.

Set clear, fair, and commercially viable terms from the outset. Remember, maintaining fairness protects not only your financial interests but also helps preserve the friendship. It’s a good idea to discuss your proposed terms with a lawyer – our article on how to sign a contract offers some great initial advice on drafting solid, enforceable agreements.

Getting A Loan Agreement

Yes, having your agreement in writing is absolutely crucial.

The last thing you want is for your friendship to sour because both parties had different understandings of the deal. A written loan agreement sets out the key commercial terms – such as the principal amount, interest rate, repayment schedule, and any security provided – along with essential legal protections for both the borrower and the lender.

Not only does this documentation provide clarity, but it also offers legal certainty. If any issues arise, you can refer back to the agreement for guidance. For detailed insights on drafting loan documents, check out our comprehensive overview on loan agreements.

Having everything in writing means that if things go wrong, you have the documentary evidence needed to support your legal position.

What To Take Away…

Lending money to friends isn’t always a binary decision of yes or no – it can be a prudent investment if you conduct thorough due diligence. It’s important that your friend has legitimate, commercial reasons for seeking the loan and that robust financial benefits and legal protections are put in place for you.

If you decide to proceed, seeking legal advice and using a well‑drafted loan agreement are the best ways to ensure a fair deal and minimise future disputes. Also, consider accessing our contract review services to ensure all terms are current and compliant with 2025 regulations.

At the end of the day, preserving your friendship matters most. Ensuring that both parties have a clear understanding of the terms can help safeguard your relationship while protecting your financial interests.

In 2025, the financial landscape continues to evolve with innovative lending platforms and stricter compliance standards. By keeping informed and utilising modern legal tools – such as our loan agreement templates and expert contract review services – you can better protect both your investment and your valued relationships. Always consult a legal professional to ensure your agreements reflect the latest regulations and market conditions.

Minna Boyle

Minna is the Head of People & Culture at Sprintlaw. After completing a law degree and working in a top-tier firm, Minna moved to NewLaw and now manages the people operations across Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.