Should You Borrow Money From Loved Ones?

A majority of entrepreneurs today finance their businesses by tapping into their savings or reaching out to family for a loan. The question that a lot of business owners ask themselves as they are getting started is, “Should I contact a friend or family member for financial assistance”?

Borrowing money from loved ones can be an easier option than applying for a traditional loan. However, it is important to know that raising capital through the help of others does come with certain risks and consequences. Although you would be borrowing from family, it is important to remember that this still needs to be a business transaction to help avoid putting a strain on personal relationships.

If you are considering contacting a loved one for assistance, note that transparency and integrity are very important. Prior to approaching them for help, be sure to consider how this may affect your relationship. One way to ensure that feelings do not get hurt during the transaction is by discussing boundaries and setting expectations. If you are not transparent with them, this could damage your relationship as you might have had different ideas about the transaction then them from the start.

Prior to asking someone for capital, be sure that you know if the individual can afford to loan money to you. Sometimes business doesn’t go according to plan, and it would be unfortunate if you lost the money they loaned you when they relied on you as an investment.

Once you know an individual can afford to risk those funds, be sure you are up front with them. Explain that although this is an opportunity to invest in your business, they should be aware that like all investments, there is a possibility the money might not grow and that it could be lost. Make sure you are being realistic with them and not overselling.

Also confirm with friends and family if the funds are a gift, investment, or a loan. This will help set expectations from the start. If this is considered an investment, what will they gain from assisting you? If it is determined that they are loaning you the funds, be sure to discuss the terms such as interest rate, monthly remittance amount, when payments begin, and length of the loan.

If you are given financial assistance, have ongoing communication with them so that they are aware of how their investment is doing. If you fail to do so, it is possible you might get multiple phone calls or emails wanting updates.

Although it can be hard to be direct with your friends and family, it is important to remember that this is a business transaction. Be sure to explain to your loved ones what the money is planned to be used for and be prepared for them to ask questions.

There are times that the business transaction may get blurry as those who are lending you money may forget that there is a difference between investing in someone and co-owning or managing a business. It can be easy for them to think that since they gave you money that their opinion of how you run your business matters and that they have a say in the way it is conducted. This scenario can be avoided by simply drawing boundaries with them and explaining how their investment will be used.

Overall, it can be awkward setting boundaries with loved ones, however, it is vital to your relationships that you separate personal and business issues. In order to ensure your relationships are not affected by this financial transaction, always make sure you are transparent and set expectations from the start. Borrowing from family and friends can be a great source of funding as long as you handle the situation with care and are clearly setting guidelines with them.