Although heter iska is a valid mechanism to avert issues of ribbis, many Poskim emphasize that a person relying on the heter iska must understand its basic principles.

We will therefore refamiliarize ourselves as to how a heter iska works. 

The heter iska is based on the distinction between a loan and an investment. A Jew is not permitted to accept interest on a loan to a fellow Jew, but he is allowed to invest with him and reap the profits.

When someone borrows money, it is his to use as he pleases. Any profit he makes from investing it therefore belongs to him, and if he shares that profit with the lender in exchange for his waiting for repayment of the loan (agar natar), it is a violation of the prohibition of ribbis. 

Invested funds, on the other hand, belong to the investor, and the profits are therefore his.

What determines whether money was given as a loan or an investment? Risk.

A loan must be repaid even if the investment the borrower made with it was a losing proposition, so the lender does not risk his capital by extending the loan. Invested funds, on the other hand, involve risk; there is no guarantee of profit or even that the investor will recoup his capital. 

The heter iska converts the loan into an investment by the lender/investor assuming risk.

But since the lender/investor wants to minimize the risk he is undertaking, he can do so by making several stipulations in the heter iska: First, if Reuven, the “managing partner” in the investment, claims that the investment lost value, it must be confirmed by two witnesses in accordance with Halachah. Second, if the managing partner (Reuven) claims that the anticipated profit was not realized, he is not trusted unless he takes an oath to that effect. He is then given the option to exempt himself from that oath if he agrees to pay an amount they agreed upon (which, in our case, is the interest paid to bank).

In most cases, it would be difficult for the recipient to prove with witnesses that there was a loss of capital, and if there was a profit, the managing partner may take an oath only if it did not reach the anticipated amount. Furthermore, even if the profits weren’t realized, the manager will generally refrain from taking an oath.

A heter iska is usually structured as palga milveh, palga pikadon, meaning that half of the capital is a loan and the other half remains the investor’s funds that he puts at risk. The investor keeps the profits generated by his capital (pikadon) and the managing partner profits from the funds he borrowed (milveh). But the manager/borrower must also be compensated for managing the investor’s funds, because if he were to do so for free in consideration of the loan, that alone would constitute ribbis. That compensation can be just a dollar if that is what was stipulated at the onset of the deal.

In other cases, the heter iska is structured as kulo pikadon, which means that the entire capital and profit belong to the investor. The manager agrees to be paid only if the profits exceed the investor’s anticipated profits, which is whatever they specify in their agreement. Kulo pikadon is necessary when the investor demands a high return that cannot realistically be realized if it is only half pikadon.

There are standardized heter iska documents available, but before filling out such a form, the parties should consult with a Rav versed in the halachos of ribbis, because certain deals will require detailed solutions or specific wording in the document. In fact, it is best to draft an individualized heter iska for each deal.