Financing the Family Member

by Chris Wendel

Nothing raises a financial red flag more than the idea of lending a loved one or family member money. But what about using your monetary resources to finance a relative’s small business startup?

58% of America’s fastest growing businesses started with $20,000 or less in startup money, and there are plenty of examples of successful businesses and corporations that began with family funding. But before you make the leap, here are some common sense guidelines you should follow:

  1. If you invest in a family member’s business, there’s a good chance that won’t be repaid in a timely manner, or at all.
  2. Still want to invest your money? Only use capital that you can afford to lose, and that won’t affect the lifestyle and the financial obligations that you presently have. Use saved money, dividends, or a financial windfall for the venture, not borrowed funds such as a personal line of credit, or worse yet borrowed funds derived from taking out a second mortgage.
  3. Make sure your business relationship with the aspiring entrepreneur is clear. Don’t become involved in the day by day operations unless asked. If the situation is right, you can serve as both a source of funding, and a mentor for the business.
  4. Many parents loan startup money to their kids because they believe in the business concept. Others invest because they realize that if their child doesn’t take the chance, they’ll wonder “What if…?” for the rest of their life. Both of these reasons are okay as long as you realize the risk.
  5. Do ask for a business plan with financial projections before offering to contribute financially. Also have your accountant or an unbiased outside party look at the plan.
  6. Make sure the person you are lending money to, has experience and a serious passion for the type of business they are pursuing.
  7. Be confident that you are loaning enough money to make the business succeed, especially through the first months of operation. Running out of money early in the game is a common problem especially for restaurants and retail businesses.
  8. Have a written agreement that includes the term of the loan, an interest rate, a payment schedule, and a contingency plan in case the borrower can’t make his or her payments.

Remember, the rules are almost the same for if you were starting a business yourself. But in this case, your gratification will not come from hard work, but from the satisfaction of watching someone else learn, persevere, and if all goes well- prosper.

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This entry was posted in Partner Resources, Resources, SBTDC and tagged , . Bookmark the permalink.

One Response to Financing the Family Member

  1. Betsi says:

    Very useful, ty! 🙂

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