Should you borrow money from family members when starting up a small business?

Written By Steps To Faculty Published May 31st, 2010

Banks can be miserable operations: they often charge exorbitant fees; they can be difficult to deal with; and they can be the last places you may want to go in search of a business loan. However, there is one thing worse than borrowing money from a bank – and that is borrowing money from a family member. Here are three reasons why you should avoid taking money from family members.

Reason 1 it mixes family with business

When you borrow a large sum of money from a family member, the relationship between you and that family member changes: it goes from being a happy and informal arrangement to a professional one in which significant obligations accrue to both parties. If someone does not pay back a loan, or if someone is slow with repayment, tensions are created away from work that can cause problems at work.

Reason 2 family members are not always the most discerning lenders

When you receive money from a family member, you have to recognize that they are not necessarily the most objective, balanced and rational actors; in short, they may be giving you that money because they believe more in you than in the viability of the business you are starting. In those instances, close ties means that you cannot rely upon family members to give you the “straight goods” in the same way that a bank can give you the “straight goods” about the viability of your plans. As a consequence, bad loans can be given out by good people who just want to help you.

Reason 3 you may be more comfortable reneging on re-payment agreements when a family member is involved

No one likes to admit it, but we often have the belief – and it is a dangerous one – that a loved one will cut us some slack on various things in a way that a stranger would not. In the case of a business loan, it is not uncommon for family members to think that they do not have to repay that particular installment back this month but can wait until next month – or can renegotiate the original terms. Suffice it to say, when people believe that their loans can be whittled down, changed at a whim, or even ignored, then it stands to reason that they will also start treating their business a similarly cavalier manner – not least of all because they do not have to find the money each month to pay off what would otherwise be one of their major commitments. When people become comfortable with not paying back a loan, it is not long before they become comfortable with other lapses, too.

Again, to echo what was said at the outset, we all love family – but family should not love us when it comes to business. Put another way, taking loans from loved ones is a dangerous proposition because the personal has now intermingled with the professional; as much as possible, you want to keep the two separate.

Roger Due

Investing in Your Destiny® & Coaching Program - Wealth Building Summit Dallas, Texas

My name is Roger Due and I am from Albuquerque, New Mexico and I am the owner of the Monsano software company. This has been an absolutely fantastic conference. This is the best I have ever been to.