Jonathan Feldman needed $30,000 cash for his business. The banks were limiting the credit they would issue him, though, and were also asking for more interest than he wanted to pay.

Instead, Jonathan tried to raise the cash from relatives and close friends. His cousin Ezra was willing to help him out and invest in the business.

“I’d like 4% return on the money annually,” said Ezra. “Can you do that?”

“Reasonable enough,” said Jonathan. “We’ll call it an investment, though, not a loan, so that there will not be a prohibition of ribbis (interest).”

They drafted a document stating: “Ezra Feldman is investing $30,000 in Jonathan Feldman’s business, and will receive 4% profit annually. After two years, either party can terminate the agreement with 60 days’ notice, and the $30,000 will be returned to Ezra.”

Ezra gave Jonathan a check for $30,000 and took a signed copy of the agreement.

Two months afterwards, Ezra had occasion to speak with his local Rav about the agreement.

“We made sure to structure it as an investment, not a loan,” Ezra said. “Am I right that there is no prohibition of ribbis in such a case?”

“Your arrangement has some of the crucial aspects of a heter iska,” replied his Rav, “but your arrangement doesn’t eliminate the prohibition of ribbis. Although you called it an investment, the money is still considered halachically a loan, and the profit, therefore, is considered interest.”

“Why is that?” asked Ezra.

“The agreement stipulates that at the termination of the agreement, the $30,000 will be returned in full, regardless of the financial state of the business,” explained his Rav. “Absolute liability of the recipient to return the full amount of the investment is tantamount to a loan, in which the borrower carries absolute liability to return the principal. Thus the purported ‘profit’ is considered interest on a loan and is prohibited (see Y.D. 177:1; Shach, Y.D. 177:1).”

“How is this different from a heter iska?” asked Ezra.

“A heter iska leaves, in theory, a small window of risk for the investor if the business should fail,” answered the Rav. “Jonathan, however, accepted full liability to return the principal.”

“What should I do now?” asked Ezra. “Can we simply agree verbally that the investment should now be in accordance with heter iska?”

“It would be best to consult Rabbi Dayan on this,” said his Rav. “I’ll give you his number.”

Ezra called Rabbi Dayan. “I invested money in my cousin’s business in a manner considered a prohibited loan,” he said. “Can we convert it into an iska agreement? Does he have to return the money? Can we agree verbally? Do we need to draft a heter iska document?”

“Returning the money and starting over as an iska agreement would certainly work,” answered Rabbi Dayan, “but it is not necessary to do that (see Nesivos, Chiddushim 176:5).”

“Can we just make a verbal statement?” asked Ezra.

“A verbal agreement of heter iska would suffice initially, but now that the money has already been given as a regular loan, it is insufficient,” answered Rabbi Dayan. “Rema cites from the Mordechai that a person who received a loan cannot convert it to an iska investment through a verbal agreement alone. The money is still considered a loan (C.M. 176:1; Shach, Y.D. 177:15, 41).”

“What if we draft and sign a heter iska document?” asked Ezra. “That’s not just a verbal agreement, it’s a document!”

“That would suffice, since this expresses clear sincerity in the agreement,” explained Rabbi Dayan. “Alternatively, the investor and recipient can make a kinyan sudar that the investment will now be in accordance with the rules of heter iska. Some recommend doing both, drafting a heter iska and making a kinyan (Dagul Me’revava, Y.D. 177:19; Bris Yehudah 35:5[19]).”

“Does this work retroactively?” asked Ezra. “What about the two months that have passed?”

“Restructuring the loan as an iska agreement only takes effect for the future,” concluded Rabbi Dayan, “but it does not allow taking ribbis for previous time (Bris Yehudah 40:23).”