When borrowing ‘love money’ from friends or family to fund your Ontario business, you must formalize the arrangement with a Commercial Loan Agreement. This usually involves drafting a secured promissory note, setting a clear repayment schedule with a reasonable interest rate, and registering a lien under the Personal Property Security Act (PPSA) for around $8 CAD per year to legally protect their capital.
Starting a new business in Ontario is expensive. Whether you are opening a cafe in Hamilton, a tech startup in Toronto, or a retail store in Sudbury, traditional banks are often hesitant to lend to brand-new ventures without substantial collateral. As a result, many founders turn to “love money”-capital borrowed from friends or family members. While this can be a lifeline, mixing personal relationships with business finances is incredibly risky.
As of May 2026, relying on a verbal promise or a quick text message to secure tens of thousands of dollars is a recipe for disaster. If the business fails, or if a disagreement arises regarding repayment terms, relationships can be permanently destroyed. To protect both the lender’s money and the founder’s relationship, Ontario law allows you to formalize this transaction using a Commercial Loan Agreement and a Promissory Note. 📝 This guide details how to structure a legally binding loan between family or friends in a professional, legally secure manner.
Step-by-Step Process for Structuring a Family Business Loan
Treat a loan from a family member exactly as you would a loan from a commercial bank. Both parties should clearly understand the terms, the risks, and the legal recourse in case of default. Working with a corporate law firm ensures the paperwork is drafted correctly. 💼
Step 1: Determining the Loan Amount and Interest Rate
The first step is agreeing on the principal amount and the interest rate. While family members might want to offer a “0% interest” loan, this can cause issues with the Canada Revenue Agency (CRA), especially if the money is being lent from a corporation they own. It is generally advisable to set a reasonable, fixed interest rate (e.g., 3% to 7%) that reflects current market conditions, compensating the lender for inflation and the risk they are taking.
Step 2: Choosing Between Secured and Unsecured
You must decide if the loan will be secured or unsecured. An unsecured loan relies solely on your promise to pay. A secured loan means the lender gets a legal claim (a lien) over the assets of your business, such as your equipment, inventory, or intellectual property. If the business defaults, a secured lender can seize those assets to recover their money. For larger sums, a secured loan is highly recommended.
Step 3: Drafting the Promissory Note and Agreement
The core of the transaction is the Commercial Loan Agreement and the Promissory Note. These documents outline the exact repayment schedule (e.g., monthly instalments of $500 CAD starting on a specific date), the maturity date (when the loan must be paid in full), and the penalties for late payments. The agreement should also define what constitutes a “default” (e.g., missing two consecutive payments or the business filing for bankruptcy).
Step 4: Including a Personal Guarantee
If your business is incorporated, the corporation is technically the borrower, not you. If the company goes bankrupt, the family member loses their money. To provide extra comfort to your lender, they may request a Personal Guarantee. 🤝 This clause makes you, the founder, personally responsible for repaying the loan out of your own pocket if the business cannot pay.
Step 5: Registering a Security Interest (PPSA)
If the loan is secured against the business’s assets, the lender must publicly register their interest. In Ontario, this is done by filing a financing statement under the Personal Property Security Act (PPSA). By registering on the provincial PPSA registry, the family member secures their priority ranking. If the business goes bankrupt, registered secured creditors get paid before unsecured creditors.
Step 6: Obtaining Independent Legal Advice (ILA)
Because family dynamics involve inherent power imbalances and emotional pressure, it is crucial that the lender obtains Independent Legal Advice (ILA). This means the family member briefly consults with their own, separate lawyer who explains the risks of the loan before they sign. Having an ILA certificate prevents the founder from ever claiming they were tricked or coerced into the agreement.
How Much Does it Cost in Ontario?
Documenting a family loan properly does involve some upfront legal and registration costs, but it is vastly cheaper than fighting a messy court battle later. Below are the estimated costs in CAD.
| Requirement | Average Estimated Cost (CAD) |
|---|---|
| Lawyer Drafting Fees (Loan & Note) | $1,000 – $2,500 |
| PPSA Registration Fee (1 to 5 years) | $8 – $40 CAD |
| Independent Legal Advice (ILA) for Lender | $300 – $600 |
| Corporate Resolution Updates | $150 – $300 |
Most founders agree to pay the legal costs out of the loan proceeds, ensuring the family member is not out-of-pocket for doing them a favour.
How Long Does the Process Take?
Structuring and executing a commercial loan agreement is relatively fast. Once both parties agree on the interest rate and repayment terms, a corporate lawyer can usually draft the Promissory Note and Loan Agreement within 1 to 2 weeks. Registering the lien on the Ontario PPSA system is done electronically and is effective almost immediately. Setting up the independent legal advice meeting for the family member might add an extra week to the timeline.
Frequently Asked Questions (FAQ)
Can I offer a 0% interest loan to a family member?
Yes, between individuals, a 0% interest loan is legally permissible in Canada. However, if the business is incorporated, the CRA may scrutinize the transaction. It is always safer to charge a nominal interest rate at or above the CRA prescribed interest rate to avoid tax complications.
What happens if the business goes bankrupt?
If it is an unsecured loan to a corporation, the family member will likely lose their money in bankruptcy, ranking at the bottom with other unsecured creditors. If the loan is secured via a PPSA registration, they have a right to seize business assets to recover their funds.
Do we really need a lawyer for a loan between friends?
While not strictly mandatory, it is highly recommended. Generic internet templates often fail to comply with Ontario’s specific PPSA laws. A lawyer ensures the loan is legally binding and that all corporate resolutions are properly filed in your minute book.
What is the difference between a loan and an equity investment?
A loan is debt; the money must be repaid with interest, regardless of whether the business is profitable. An equity investment means the family member is buying shares in the company; they own a piece of the business, but they only make money if the business succeeds and is sold or pays dividends.
Can the family member seize my personal house if I default?
Only if you signed a Personal Guarantee and used your house as collateral. If the loan was made strictly to your corporation without a personal guarantee, your personal assets (like your home and savings) are generally protected from seizure.
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