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Accepting Start-Up Capital from a Family Member: Good or Bad?

If you need money to start a business, one of the easiest ways is through your family member. But is it good? Is it even advisable to ask for money to start a business from a family member?

I’ve listed the pros and cons. Feel free to email me if you have anything else to add

PROS

• very accessible
• fast and easiest way to get start up capital
• you don’t need to prepare a comprehensive business plan (e.g. you don’t have a buy a business plan software or writer)
• no voluminous paperwork required such as banks or SBA loans
• no collateral required
• no credit checking; even if your credit history is poor, you can still get startup capital
• will not care if you put in equity investment or not
• it feels good to know that your family is behind your decision to start a business and supportive of your endeavors
• they are investing in YOU, not necessarily your business idea
• interest, if any, can be lower (sometimes, there’s no interest!)
• unlike banks that typically shy away from companies without a proven track record or assets to guarantee the loan, family members can give you loan even if you know nothing about the business
• will give you money even if they think return on investment is not sizeable (venture capitalists will not give money if expected ROI is too miniscule)

CONS

• family will feel that they can make decisions on how your business is run or handled;
• family members will not be silent partners and you will often hear “suggestions” on how to do this and do that
• if things go bad, you won’t hear the end of it in family affairs, reunions and such
• relationships can be put at risk, or worse, severed, especially if you lose all the money

RECOMMENDATIONS:

• Explain the risk to them – that by loaning you funds for your startup capital, there is the possibility that the money can be lost. Make sure they understand the risk
• Accept the funds only if you know that this is extra money or this money can be earned again by the family member; don’t accept it if you know this is the last money of your 80-year old grandma that if you lose this money she will have no money for the rest of her life
• Make borrowing from family members more formal -present to them how the business will be done, your estimates. Do some sort of a less formal business plan
• Draft a loan agreement that specifies an interest rate and payment plan and have your family member sign it before accepting their money
• Keep it to a minimum – if you still want to have a family