Businesses in the UAE have a few financing options available to them to help them grow their operations these days. They have the conventional — a loan from a bank, with high interest rates and arrangement fees, the unwise — using credit cards, and some have even turned to mortgaging their properties.

There is, however, another time-honoured means of garnering finance: family and friends. Borrowing from your family or friends continues to be popular today; a 2015 MEED survey found that 49 per cent of SME owners in the UAE turn to loved ones as a central means of acquiring finance. In comparison, just 41 per cent turn to banks, and 10 per cent turn to other sources such as private sources, angel investors, and credit cards and savings.

There are good reasons to borrow from the people you know. One of the biggest advantages is that you are likely to pay a much lower interest rate, and negotiate favourable repayment terms. This is especially advantageous in the UAE, where failure to pay back a loan can result in severe penalties or even jail time.

But one of the biggest disadvantages of this system is that it can lead to strained relationships between family and friends, especially if things go wrong. A fight or disagreement could lead to uncomfortable feelings about outstanding loans, creating a need for contingency plans for paying back the money early, which might not be possible.

Another potential downside is that a close relationship between lender and business owner may leave the lender with the feeling he or she is a part owner of the company, with a right to interfere in business decisions.

So while the repayment terms may be more flexible, they must not be ambiguous. In fact the most important part of borrowing from loved ones is that the loan is put in writing to ensure that all parties understand — and agree to — the terms before signing loan paperwork. It is crucial to clarify that the loan is strictly a financial decision, setting a boundary that can’t always be managed between family and friends as easily as it is through official financial institutions.

And on the other side of the relationship, individuals who have loaned their money to a family member or friend must be conscious that they could lose their money, or not be paid back on time.

But new financing methods can help alleviate many of those issues. Most notably, peer-to-peer (P2P) finance platforms formalise the process of borrowing from friends and family, allowing business owners to enjoy the benefits of the arrangement, without the complications it may entail.

Beehive, the UAE’s first P2P finance platform, directly connects investors with creditworthy businesses to build relationships that benefit both parties. Many of the investors on the platform are friends or family of the business owners, and Beehive enables them to invest their capital into businesses they care about on a personal as well as professional level, while at the same time receiving a good return on their money.

P2P finance leverages the technology of crowdfunding to build a community of entrepreneurs and investors working together to turn innovative ideas into profits. The technology enables businesses on platforms to save an average of 30 per cent on their financing costs, much higher than the average unsecured bank borrowing rate for SMEs in the UAE of 18 per cent. And just as important, it is helping cultivate innovation in line with the UAE’s drive for an innovation economy.

Ravi Bhusari turned to P2P to secure financing for his sports league business, Duplays. His family and friends wanted to support the growth of his business, but he felt uncomfortable with the idea of them lending him money without official terms. P2P finance made the whole process much cleaner.

Ravi’s business was audited and analysed with due diligence as stringent as any bank, so that Ravi’s family and friends had peace of mind about the safety of their money.

Wadih Haddad, the founder of self-storage business The Box, found that listing on a P2P finance platform encouraged even more friends and family members to invest in his business because they were able to view the details in a clear and informative way.

P2P lending gave his loved ones an opportunity to support the growth of his business, as well as benefit from its growth. It also cut out the costs and complexities of conventional finance, making the process quicker and easier, with payments transferred directly to investors without any hassle.

By formalising the investment process, P2P finance has not only created a more transparent loan market and provided SMEs in the UAE with cheaper, quicker, and more flexible access to finance.

It has likely saved a few relationships and friendships along the way too.

The writer is the CEO of Beehive.