Documenting a Family Loan Used to Help Buy an Ontario Business

A parent, sibling, or in-law offering to help fund a business purchase is common — and it's one of the easiest pieces of a deal to get legally wrong. Because the money is coming from someone you trust, it's tempting to skip the paperwork. But a family loan for a business purchase that exists only as a verbal understanding can create real problems later: with your bank or BDC lender, with the seller's closing conditions, and eventually within the family itself.

This article walks through what should be put in writing when family money is helping fund a business acquisition, how security typically works, and what needs to be disclosed to other parties in the deal.

Why a Handshake Isn't Enough

An undocumented family loan tends to cause trouble at exactly the moments you can least afford it — during lender underwriting, when the business hits a rough patch and repayment expectations start to diverge, or years later when a lending family member's estate is being settled and nobody agrees whether the money was ever meant to be repaid.

Putting the arrangement in writing protects everyone: the buyer has a clear record of their obligations, the family lender has an enforceable right to repayment (if that's the intent), and both sides avoid relying on memory about what was agreed at the kitchen table.

What a Family Loan Agreement Should Cover

A proper loan agreement, even a short one, should set out:

• The principal amount advanced and the date(s) it was or will be paid
• Whether interest applies, and if so, how the rate is determined (this is a negotiated term between the parties, not something set by law)
• The repayment schedule — a fixed schedule, a balloon payment, or repayable on demand
• What happens on default — for example, whether the full balance becomes due immediately
• Whether the loan is secured against any specific asset, and on what terms
• Signatures and a date, ideally with each party having had the chance to ask questions before signing

Keeping a written record of how the funds were actually transferred (bank records showing the transfer date and amount) is just as important as the agreement itself — it's the evidence that ties the paperwork to what actually happened.

Gift or Loan? Why the Label Matters

Before drafting anything, the family needs to agree — clearly — on whether the money is a gift or a loan. This isn't just semantics. The distinction can matter for:

• Family expectations and fairness among siblings, especially if only one sibling is buying a business and others are not receiving comparable support
• What happens on a marriage breakdown, where gifts and loans to a spouse can be treated differently
• How the funds should be treated on the lending family member's own estate, if the loan is still outstanding when they pass away

Once the family decides which it is, the paperwork and the parties' later conduct should be consistent with that choice — a "loan" that is never repaid and never pursued can look, in practice, like a gift regardless of what the document says.

Security: Should the Loan Be Secured?

Whether a family loan needs security depends on the amount involved and how comfortable the lending family member is with an unsecured arrangement. Options include:

• Leaving it unsecured, relying on the written loan agreement alone
• Registering a general security interest against the buyer's personal property under Ontario's Personal Property Security Act (PPSA), which gives the family lender a registered claim ahead of some other unsecured creditors if things go wrong. Registering this kind of security carries a modest filing fee (roughly $8 per year of the registration term, as of mid-2026 — verify the current fee before relying on it)
• A charge against real property, if the loan is tied to a home or other real estate

Security registrations need to be coordinated with any other lender in the deal — a bank or BDC providing senior acquisition financing will usually want to know about, and may require priority over, any security a family member takes.

Telling Your Senior Lender and the Seller

If part of your down payment or purchase price is coming from a family loan, don't assume it can stay quiet:

• Senior lenders generally ask about the source of a buyer's down payment. Many want to know whether contributed funds are truly the buyer's own or themselves borrowed, since that affects how they assess the buyer's real equity in the deal. Some lenders have their own policies on borrowed down payments — confirm this directly with your lender.
• The seller isn't usually entitled to know how you're funding your purchase, but if the family loan is meant to be secured against the very assets being purchased, that needs to be reflected properly in the closing mechanics.

A Simple Documentation Checklist

• [ ] Agree as a family on gift vs. loan, in plain terms, before any money moves
• [ ] Put the loan terms in a signed written agreement
• [ ] Decide on interest, repayment schedule, and default consequences
• [ ] Decide whether the loan will be secured, and register any security properly
• [ ] Disclose the funding source to your senior lender if you're also using bank or BDC financing
• [ ] Keep bank records showing the actual transfer of funds
• [ ] Get independent tax or estate-planning advice if the amount is significant

Frequently asked questions