Personal loan to a friend procedure
If this isn't a case where you would be willing to forgive the debt if they can't pay, it's a business transaction, not a friend transaction. Establish exactly what the interest rate will be, what the term of the loan is, whether periodic payments are required, how much is covered by those payments vs. being due at the end of the term as a balloon payment, whether they can make additional payments to reduce the principal early... Get it all in writing and signed by all concerned before any money changes hands. Consider having a lawyer review the language before signing. If the loan is large enough that it might incur gift taxes, then you may want to go the extra distance to make it a real, properly documented, intra-family loan. To do this you must charge (of at least pay taxes on) at least a certain minimal interest rate, and they have to make regular payments (or you can gift them the payments but you still won't up paying tax on the interest income). In this case you definitely want a lawyer to draw up the papers, I think. There are services on the web Antioch specialize in helping to set this up properly, and which offer services such as bookkeeping and monthly billing (aT extra cost) to make it less hassle for the lender. If the loan will be structured as a mortgage on the borrower's house -- making the interest deductible for the borrower in the US -- there are additional forms that need to be filled. The services can help with that too, for appropriate fees. Again, this probably wants experts writing the agreement, to make sure it's properly written for where you and the borrower live. Caveat: all the above is assuming USA. Rules may be very different elsewhere. I've done a formal intractability mortgage -- mostly to avoid gift tax -- and it wasn't too awful a hassle. Your mileage will vary.
The one thing your friend needs to understand is for every dollar paid out, there is somebody paying that dollar in.  The mark of a Ponzi scheme is that it feeds on itself. The stock market has trade volumes where it almost meets the definition of a Ponzi scheme.  However, it deals with shares in actual production facilities (rather than only financial institutions) and provides means of production in return for large amounts of the profits.  So there is someone legitimately expecting to pay back more than he gets out, in return for the availability of money at a time where he could not finance matters except by credit. With your friend's scheme, there is nobody expected to pay more than he gets out. Nail him down with that: every dollar paid out has to be paid in.  Who is the one paying? At this point of time, it sounds like there will be two possible outcomes.  You'll be visiting your friend in debtors' prison, or you'll visit him in criminal prison.  If you highly value your friendship, you might get him out of the former with your own money.  You won't be able with the latter.  And if you let him exploit his standing for scamming his community, make no mistake, it will be the latter. I don't envy you. Banks will usually look at 2 years worth of tax returns for issuing business credit.  If those aren't available (for instance, for recently formed businesses), they will look at the personal returns of the owners. Unfortunately, it sounds like your friend is in the latter category. Bringing in another partner isn't necessarily going to help, either; with only two partners / owners, the bank would probably look at both owners' personal tax returns and credit histories.  It may be necessary to offer collateral. I'm sorry I can't offer any better solutions, but alternative funding such as personal loans from family & friends could be necessary.  Perhaps making them partners in exchange for capital. employed under the table and doesn't have a bank account If I could make that size 10,000,000 font I would.  Your friend likely also isn't paying taxes.  The student loan penalties will be nothing compared to what the IRS does to you.   Avoid taking financial advice from that person. In short getting funds converted outside of the Banking channel is illegal in India as Foreign Exchange is still regulated. If you show only a credit from your friend's NRE account to your NRO account [note it can't be your NRE account], it would be treated as GIFT and taxed accordingly, else you would have to show it as loan and pay back. You may show the payback in USD. But then there is a limit of Fx every individual can get converted/repatriate out of India and there is a purpose of remittance, all these complicate this further. I would advise against this, answering only the first part of question #1. Borrowing and lending money among friends and family members can often ruin relationships.  While it can sometimes be done successfully, this is most likely not the case.  All parties involved have to approach this uniquely in order for it to work.  This would include your son's future significant other.  Obviously you have done very well financially, congratulations.  Your view for your son might be for him to pay you off ASAP:   Even after becoming a doctor, continue to live like a student until the loan is paid off.   His view might be more conventional; get the car and house and pay off my loans before I am 50.  He may start with your view, but two years in he marries a woman that pressures him to be more conventional.   My advice would be to give if you can afford to, but if not, do not lend.  If you decide to lend then come up with a very clear agreement on the repayment schedule and consequences of non-payment.  You may want to see a lawyer. For the rest of it, interest payments received are taxable. File a small claims lawsuit in the city that the person resides. The court will charge you a small fee and give you a date. They will also summons the other person to appear.  Bring all the documentation that shows the following BONUS  - Bring the documentation that shows them saying they will not pay you back I had to sue someone once for a very similar problem. I lent them a 6 month interest free loan. They told me to shove it after 6 months and 1 day. So I sued them.  The court should accept facebook messages as proof. More than likely though your friend wont even show up which means you win by default.  Here's the bad news, that was the easy part. Just because you win in court doesn't mean the money appears the next day. There are a couple ways you may have to recover your money. Best of luck to you! "Just to go against the grain here. Sometimes, loaning money to friends is the right thing to do. For example, they had a loved one die, and need the money to cover funeral expenses until the life insurance pays out. Here, you may consider it your ethical duty to loan the money (or you may not). It does not make sense from a financial point of view (you are unlikely to charge interest and you are taking all the risk), but sometimes you put your financial prudence aside because ""being a good person and a great friend"" is more important. It is true that the general rule should be not to loan money to friends, and particularly never loan money you cannot afford to lose. But there are exceptions to every rule. I'll note that you may be best off with a plain-english, non-lawyery contract. Make it absolutely as simple as possible. As others have pointed out, specify a repayment date or schedule. Note what happens if they miss the deadline. Specify interest, if appropriate. Get it signed by you and the other person. And make sure you consider what happens if your friend doesn't honour the agreement. For that kind of money, it is also worth considering collateral." "I can't vouch for Australian law, but in the US there is actually a recognized mechanism for ""in-family loans"" which ensures that it's all fully documented for tax purposes, including filing it as an official second mortgage. (Just did that recently in my own family, which is why I'm aware of it.) We're required to charge at least some interest (there's a minimum set, currently around 0.3%), and the interest is taxable income, and it is wise to get a lawyer to draw up the paperwork (there are a few services which specialize in this, charging a flat fee of about US$700 if the loan is standard enough that they can handle it as fill-in-the-blank), but outside of that it's pretty painless. This can also be used as a way of shifting gift limits from year to year -- if you issue a loan, and then gift the recipient with the payments each year (including the payments), you've effectively spread the immediate transfer of money over multiple years of taxes. Of course it does cost you the legal paperwork and the tax in the interest (which they're still ""paying"" out of your gift), but it can be a useful tool, and it's one that wasn't well known until recently. Again: This is all US codes, posted only for comparison (and for the benefit of US readers). It may be completely irrelevant. But it may be worth investigating whether Oz has something similar." "The answer to your question is...it depends.  Depending on the state you, your friend, and the LLC are located in, it can be very easy to run afoul of state banking laws, or to somehow violate some other statute pertaining to the legal activities an LLC may undertake by doing something like a loan. It is not unusual (or illegal) for officers or employees of a business entity to be loaned money by the company they work for, so something of this nature wouldn't be an issue with regulatory agencies.  Having your LLC loan money to a friend who isn't an employee or officer of your LLC just might not be kosher though. The best advice I can give is that you should call the state banking commission or similar agency in your state and ask them whether what you want to do is alright.  The LAST thing you want is to end up with auditors or regulators sniffing around your business, even if you haven't done anything wrong, and you certainly don't want to run the risk of accidentally ""piercing the corporate veil"", as someone else here astutely pointed out. Good luck!" The standard approach is to reach an agreement and put it in writing. What you agree upon is up to you, but in the US if you want to avoid gift taxes larger loans need to be properly documented and must charge at least a certain minimal interest rate. (Or at least you must declare and be taxed upon that minimal income even if you don't actually charge it. Last I looked, the federal requirement was somewhere under 0.3%, so this isn't usually an issue. There may also be state rules.) When doing business with friends, treat it as business first, friendship second. Otherwise you risk losing both money and friendship. Regarding what rate to charge: That is something you two have to negotiate, based on how much the borrower needs the money, how much lending the money puts the lender at risk, how generous each is feeling, etc. Sorry, but there is no one-size-fits-all answer here. What I charge (or insist on paying to) my brother might be different from what I charge my cousin, or a co-worker, or best friend, or... If both parties think it's fair, it's fair. If you can't reach an agreement, of course, the loan doesn't happen. This is called a fraudulent conveyance because its purpose is to prevent a creditor from getting repaid. It is subject to claw back under US law, which is a fancy way of saying that your friend will have to pay the bank back. Most jurisdictions have similar laws. It is probably a crime as well, but that varies by jurisdiction. "If you wish to lend them the money, make the check payable to the order of  ""loan"", not directly to your son or daughter." Its participating preferred with a 1x liquidation preference. Very unfriendly for the company owner. Most startups these days are seeded with convertible notes because there's less thinking about the valuation of the company; that question is booted to the series A. its also easier to draw up the legal docs; pretty much a standard loan agreement. Finally, it can be far friendlier for the owner depending on if the note is an uncapped note. This is expensive financing and your friend can definitely find cheaper money if he looks for it. Interest payments You can make loans to people and collect interest. You should only loan money to friends or relatives if you are fully accepting the possibility of never ever getting that money back.  And in this situation it can happen that you will be forced to give him a very large loan if something bad ever happens to him. (Paying the monthly rates instead of him and expecting he will someday pay it back to you is technically the same as loaning him money).  Something might happen in the future which will result in him not paying his monthly payments. Maybe not now, but in 5 years. Or 10. The economy might change, he might be out of a job, his personal values might change. A house mortgage is long term, and during that time a lot can happen.