Think Twice Before Borrowing from Family

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Miller says an interest payment schedule is a good idea, and the owner should definitely make it clear what will happen "if all that money is lost."

EXTREME MEASURES.

Karofsky says guarantees could even include something like a second mortgage on the owner's house. But that could put relatives in an uncomfortable position. In effect, Karofsky says, the owner is saying to his or her relatives, "You would have a second mortgage on my house if this thing goes broke. If this thing goes, are you prepared to put me on the street?"

Overall, Karofsky says, "My basic guideline is [to] keep [lending] to an absolute minimum," especially since business obligations make relations so tense.

In New York City, which has thousands of small businesses, these issues can happen anywhere. And in a city flush with immigrants, the ethics of borrowing money from family members sometimes differs from group to group.

CULTURAL DIFFERENCES.

The SBA's SCORE program for small business owners sees 40 to 50 walk-ins a day, Miller says. "Counselors go over what are the sources of financing, including family loans. People typically aren't shy when they talk about what their finances are." Which is a good thing, "since 15% to 20% of family loans go belly up," Miller adds.

In Queens, the most ethnically diverse county in the U.S., immigrants hail from more than 130 countries -- but many immigrant business owners still shy away from borrowing money directly from their families.

Flushing, a neighborhood in western Queens, contains New York's largest Chinese population and an equally sizable Korean one. Fred Fu, the president of the Flushing Chinese Business Assn., says Chinese business owners in Flushing tend to start businesses using money from their savings. "Very few borrow money from their families," he says.

SAD STATS.

Chinese restaurants, Fu continues, "will have two, three, or four partners" that share ownership. He added that it's more common for friends to join together and form a business than for Chinese immigrants to seek help from their families.

Each immigrant community, of course, gets money from different sources, not always their friends or family. Fu says that Korean business owners in Flushing -- and all over New York -- often receive loans from their church, since churches play an enormous role in Korean communities. "It's like a circle" in the community, he says. "Koreans get money from the church and they give money back to the churches."

No matter where you live in New York City or from what country you hail, the chances of having a successful small business in New York are depressingly low.

Korn says 95% of all small businesses in New York fail. The SBA tries to help businesses get money if they can, he says. "If they have some marginal credit, we can get them some money. But if they're just completely unknowledgeable about what they're going to do, no bank is going to give them money. They have to have a business plan." And such a demonstration of professionalism can only help to sway dubious family members, too.

Galland is an editor at BusinessWeek .