Most entrepreneurs at one time or another consider borrowing money from friends or family.
While most of these lending deals start out friendly enough, the relationship can quickly sour if payments are missed or money is lost. It’s impossible to guarantee your business is a risk-free investment, but there are ways to limit the chances of any ill feelings among your loved ones if the investment does goes south.
When borrowing from family “the application process is easier, you can get the money quicker and you’re dealing with a person, not a bank,” says Hunter Hoffman, a spokesman for Hiscox USA. “When things go wrong, there can be a lot of bad things. Nobody wants to talk about back payments at Thanksgiving dinner and one bad relationship can negatively impact the whole family.”
From making the terms sweeter than a bank’s offerings to drawing up a contract, here are four steps to borrowing from family without becoming the black sheep.
Step 1: Borrow for the Right Reasons
For many small businesses, especially ones in the early stages, hitting the market with their product and service without it being fully funded can be scary. Because of that they will turn to family or friends for more funding, but that, according to Grant Cardone, can be a big mistake.
“A lot of people think they need money first,” says Cardone. “It can be a short cut that people take to avoid going out into the marketplace.” According to Cardone, business owners have to make sure they are borrowing the money because they truly need it, and not because they don’t think they are ready to hit the streets with their product or service.
Step 2: Treat it Like a Business Transaction
When it comes to borrowing from family and friends it’s easy to make the deal a handshake one, but experts say it has to be treated as a real business transaction. That means having an official contract drawn up to document the deal, spelling out the interest rates, payback schedules, due dates and other specifics, says Hoffman. The last thing you want to do is start squabbling with friends and family about the interest rate you supposedly agreed upon, or when you said you would start paying it back.
“Even if you’re family, this is a business transaction,” says Hoffman. “Treat this like any other business transaction and don’t let emotions play any role.”
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