Should Your Family Fund Your Business?

Feb 1, 2013

As families gather for the holidays, entrepreneurs might consider approaching family members for money to help fund and grow their business.

But is family funding a good idea?

Maybe.

Considerations include the amount of money involved, how involved the family members will be in the business, and the personal relationships between the borrowers and lenders.

Advantages of Family Investors

  •  They are not likely to conduct background checks or review credit scores.
  •  Relatives will do you a favor, banks and other professional lenders will not.
  • Loans are often made at no interest.
  • Relatives will likely be more flexible in their repayment timetable.
  • Kinfolk will care about the long-term success of the business more so than an outsider will.

Challenges of Family Investors

  • Unwanted advice from family members.
  • Borrowing money can strain family relationships.
  • Children who borrow from parents may feel as if they can never escape their shadows.
  • Extended family members might be just as demanding as a bank - especially if things go south.

Things to Consider

  • Put the contract in writing and spell out the amount borrowed, payment time frame, and percentage of the company, if any, the lender will own.
  • Stipulate what happens if the business fails.
  • Lending to a family member can become complicated if the business fails. Consider how failure of the company might complicate family relationships. It can certainly ruin a holiday gathering!
  • A loan from a relative is still a business agreement. Treat it as such.

If you balance the pros and cons and are still unsure, then it might be best to seek outside funding. There are plenty of small banks, credit unions, and alternative lenders who are making cash available to small business owners. Use the internet to search for a business loan and find the best deal at the most attractive interest rates.

A frequently quoted expert on small business lending and recently named the Top Entrepreneur of 2011 by Crain’s New York Business, Rohit Arora is CEO of Biz2Credit, which connects small business owners with 300 lenders, credit rating agencies and service providers. Since 2007, Biz2Credit has secured $400 million in funding for small businesses in New York and across the U.S. via its safe, efficient online platform.

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