“I need my money back this week,” Frank’s son yelled. “I wanted to help you and did my best, but your business is not working, and I need my money now! You haven’t made your promised payments to me in six months. You know that I’m not rich.”
Frank hung up the phone in anger—or was it embarrassment—or maybe both? He knew that his son was right, but he didn’t want to admit that he was failing and letting a loved one down.
While this is a made-up situation, many founders of organizations and businesses have had such experiences.
Starting any kind of organization or business takes a lot of money, and since new founders don’t often have it, we think that one of the best possibilities might be reaching out to our friends or family members. I mean, they know us, trust us, love us, and want to help us. Right?
Still, while borrowing from our close relations might at first seem like a great idea, we should certainly consider the pros and cons before doing so. While many founders have financed their organizations or businesses with a little (or a lot of) help from friends and family members, some have had great experiences, and some have had terrible experiences.
On the positive side, our friends and family members generally don’t need to check our credit or verify our honesty since they already know us, and therefore we probably won’t need the collateral and paperwork we’d need for a bank loan. Moreover, they’re more likely to loan us the money with low or no interest and a flexible payment plan.
And while these are wonderful benefits, we shouldn’t overlook the risks in such arrangements. Perhaps, first and foremost, we don’t want to let these people down since they are important to us and obviously care about us. If we start getting behind on payments, they might become worried, annoyed or even angry, and it could cause problems in the relationship—something we almost certainly want to avoid. In fact, in some cases, we could actually lose them forever.
Another problem is that they might not have the kind of money we need, which could either limit our business or force us to seek funding elsewhere anyway.
We should also remember that just asking them for a loan in the first place could put them in an uncomfortable position since they almost certainly won’t want to disappoint us. “The ask” alone can therefore be quite uncomfortable for some of us.
On the other hand, it can also be embarrassing for us to ask them for money. One founder borrowed a few hundred dollars from his young daughter until he could get some money out of the bank a couple of days later. Afterward, she would sometimes mention that she’d loaned him money in front of other people, and every time she did so, he would cringe. It was humiliating.
If, after considering these risks, we still decide to borrow money from our friends or family members, we can help protect the relationship by following a few guidelines.
First, we need to be honest about our situation, so that our lender knows what they’re signing up for. While we can show our excitement about the prospects for the business, we also need to be realistic. Moreover, we should treat the loan like a formal loan, putting the agreed-upon arrangement in writing and detailing the interest rate and the repayment schedule.
It’s also essential to keep in contact with the lender and let them know how things are going so they don’t have to wonder if we forgot about them or are ignoring them, especially if we miss a payment.
We must try our best to live by the terms we set, and it wouldn’t hurt to have a backup plan to pay them back if the business fails.
It would be terrible—and heartbreaking—to lose someone who clearly cares about us over a broken business contract.
