Need money for your small business? There are lots of options for financing and in uncertain economic times it’s understandable that you may think of your family first. But borrowing from Aunt Bernice is likely the worst option available to you. Here are five reasons why.
5. Your Aunt Bernice might be inclined to dispense business advice along with her cash.
Tonia Papke, CFO of Business Center for New Americans warned in an Entrepreneur article, “Your family members or friends may think lending you money gives them license to meddle.” Aunt Bernice may be a very mild mannered lady who keeps her own counsel, but once she invests in your business, she’s likely to have any number of well-meaning ideas for your business (e.g., give Cousin Nathan a job, use her neighbor as your accountant, etc.) that might be exactly wrong for you. Can you say, “Strings attached?” It’s not a reflection on Aunt Bernice, of course, just something we humans do…wouldn’t you?
4. You are potentially putting your parents in an awkward position.
Remember that Aunt Bernice is also your father’s sister. Once presented with the request, she may turn to your father for his opinion about whether or not she should lend you the money. Congratulations, you’ve just introduced fresh tension into the relationship between your father and his sibling or, even better, you and your father. That’s without taking into consideration that your mother may weigh in on the conversation so…you see where we’re going with this.
3. If your business flounders, you may find yourself with a few newly-estranged family members.
A certain percentage of new businesses fail. That’s reality. But if you default on a loan from Aunt Bernice, your aunt, your uncle and your cousins may stop speaking to you, assuming that you mismanaged their money. Or worse. Even if they don’t stop speaking to you entirely, you run the risk of introducing unpleasantness at future family get-togethers.
2. Since it’s awkward to ask, you’re likely to ask the wrong way.
Knowing that it might be a bit uncomfortable, you try to slip the request in informally, perhaps at a family wedding, barbeque or other social event. This puts Aunt Bernice at a significant disadvantage. If she’s business savvy, she won’t have the hard numbers she needs to make a thoughtful business decision. If she’s not business savvy, she may be flustered, and even hurt, when she realizes that her doting niece or nephew is thinking of her as a cash cow.
Small business attorney Cliff Ennico elaborates. “Because friend/family investments are usually made in a very informal way, misunderstandings can occur about precisely what the friend or family member expects in return for their money. You may think it is a loan, which you will repay in time with interest. Your friend or family member, on the other hand, may think of it as an investment for which they will receive stock or an ownership interest in your business. That initial confusion may have bad legal consequences down the road.”
1. There’s no escaping it. Borrowing from Aunt Bernice changes the nature of the relationship.
In an interview with Inc., Matt Winnick of Endgame Partners cautions, “Borrowing from your loved ones requires strong relationships to weather the inevitable ups and downs and not ruin your next Thanksgiving.”
When you hit up Aunt Bernice, there’s no way around the fact that you’ve introduced a new dynamic into your relationship with her, one that can have negative ripple effects on the whole family. When you approach a bank or lending institution you automatically enter into a process where the roles are clear and there is little or no emotional investment. You’re asking for money and they are there to disburse money on loan to projects they deem worthy. So however tempting it may be to turn to friends or family to help with business financing, save yourself the headache and look for a lending institution.
Sam Brandes is a FastUpFront Blog contributor and business author. FastUpFront helps your small business grow.