Before You Borrow from First Bank of Dad
If your business goes bad, it can drag your family ties down with it
Most small business are initially capitalized by savings accounts, credit
cards, and family loans. I wonder if there's any correlation between this
fact and the high divorce rate among entrepreneurs.
Family loans, in particular, can cause great tension, especially when the
numbers you filled in on the first business plan turn out to be a tad
optimistic. It's wise to take precautions before borrowing money
from a family member, or you might end up in the devastating situation that
this man found himself in:
"My wife and I were married for five years. Against my better judgment, I
borrowed $25,000 from her dad to open a restaurant. I was concerned at the
time about taking his money. What if it didn't work out? What would that do
to our marriage? But my wife thought I walked on water, and hey I was a
newlywed. I wasn't going to tell her she was wrong.
"Her dad wanted only the best for his precious princess, and she convinced
him that what she wanted more than anything was for me to succeed as a
businessman. She begged him for the money, and finally, he caved in. Talk
about pressure! I had a new wife and a father-in-law to whom I was indebted.
"I tried to make it work, but it was a nightmare. I worked 100 hours a week, but
the restaurant barely broke even. My wife and I grew apart. I was always working, and she hated me for
not making her and her dad rich. She looked at me like I had betrayed her. Her dad barely spoke to me
at family gatherings.
"Now, she and I are splitting up, and I'm filing for bankruptcy. I don't
think that she or her dad will ever forgive me. I don't know how I'll forgive myself. I'll never get
into a business deal with family again."
It doesn't have to turn out this bad even if the business isn't
successful. But it can happen. Consider the following before you borrow
money from family members:
1) Don't sugarcoat the odds facing a new business. Make sure that family
lenders go into it with their eyes open.
2) Borrow money only from those who can afford to lose it all. The last thing you want to do is
wipe out grandma's pension.
3) Trust your gut. If it tells you that borrowing from relatives will jeopardize relations with
them, find another way to get the money.
4) Put all your agreements in writing, and keep the family apprised of business developments. You
don't want to surprise them with bad news three years after they gave you the money.
5) Try not to take all your capital from one person. It gives that person too much power and puts
both of you at too much risk.
6) Determine at the beginning what role your family wants in exchange for its money. They might
want a say in how you run your business. If the investor demands more input than you think you agreed
to, express your concerns and negotiate a new deal.
7) Don't kid yourself that it's possible to keep family and business separate. You are entwined
until you pay them back.
When it works, you have the joy of providing a better quality of life for
your extended family, and they have the satisfaction of helping you achieve
your dreams. But you always must think about what can happen if it doesn't
Have a question on how to handle the pressures of running a business and the impact
on your personal life, marriage, and family? Contact Azriela Jaffe at AZ@azriela.com. Please put
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