Borrowing Money From Family For Your Business? Good Idea Or Bad Idea?

If you are starting a new business and are in need of capital, you have many different options. You can apply for a traditional bank loan if you have good credit, and typically, you can get a good interest rate. If you don’t have great credit, there are other options like alternative lending sources such as bad credit business loans. However, these loans do carry an interest rate, and you’ll have to pay the money back with interest. If you have family members who are rolling in the dough, borrowing money from them is also an option, but is it a good idea?

If you have someone in your family, or perhaps even a close friend, that you trust and that you know a borrowing-lending situation won’t get awkward or taint your relationship, then it can be a great way to get capital you need. Here are some guidelines offered by SBA.gov to help you with the process of lending-borrowing from family or friends.

Borrow From Someone Who Gets Business – You don’t want to choose someone to finance your venture that simply has money. Of course that is part of it, but you want to team up with someone who understand the ins and outs of business, and will know what they are getting into. That why, there will be no surprises when you hit bumps in the road. You also want to pick someone who can help motivate you to achieve your financial goals, and won’t get thrown off by potential risks. 

Put In The Work – Before you ask for money, make sure that you have done all the research and put together a solid business plan, or a plan of how you are going to make money with the money they are investing. Nothing will motivate people more to finance your cause than when they see you have done the research and the work in order to make your business profitable.

Be Straightforward – There is nothing worse than returning to your friend or family member every so often asking them for just a little bit more cash, especially when there is no end in sight. Do your research ahead of time, so you will know exactly how much you need, and then ask for it all up front. If you can’t get the whole amount that you need up front, it may not even be worth the initial investment.

Come Up With Repayment Terms – Remember that friends and family aren’t there to fund your ventures. Treat this as a business transaction and make specific terms for repayment. Let them know what you are capable of doing up front, and then see if that works for them. If you make an agreement up front, then you won’t ever have to worry about getting in an argument about money later. Remember, they are doing you a favor, and you want to repay them as soon as possible.

We would love to hear what you think in the comments. Is borrowing-lending money from family members a good idea or a bad idea?