What are the pros and cons of accepting startup capital from a family member?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
- 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)
- will not require you to put your own equity investment
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
SUGGESTIONS:
1. 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
2. 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
3. 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
4. Draft a loan agreement that specifies an interest rate and payment plan and have your family member sign it before accepting their money
4. Keep it to a minimum - if you still want to have a family con, you'll be estranged for ever if it goes bad, and if it goes good then you'll be estranged when you want to split it up. The Pro is that its easy to get the money It is one of the easiest ways to get some start up money when you don't have the credit or financial background, but depending on the expectation of those who you borrow from, it can end up in very uncomfortable relationships. Plus if you make a go of it, the lenders will want to take credit and participate in the profits.
That can be a problem since most people are not very logical and expect huge percentages, even though you only have 100% to start with.
Writing things up and having everyone involved sign it is very necessary, because peoples memory has the tendency to be very bad and always to their advantage.
Have them write up an agreement, since an agreement, if challenged in court, is always interpreted against the person(s) who wrote it up, since they had the best chance to set it to their advantage. There are no positives.
The negatives are you are violating the very wise wisdom, "Never go into business with family."
What if your business flops? You're going to be in a very uncomfortable situation. Does the family member expect to be paid back? Probably, are you going to be able to pay it back? Probably not. PRO - You cold make a family member wealthy.
CON - You may end up with a family member that never talks to you again. Pros: an easy start, no interest to pay
Cons: you definitely have to pay it back, and you might get a bit relaxed being family and all.
accept it only if you are going to pay as you would pay a bank [except for the interest of course] You have to consider the family member, a part of the business. That could be pro or a con. Being in buisness with a family member, is said to often be, a bad idea. But if the member offred, accept it. I haven't any one in my family to help me that way. You need to be clear with them that the venture could fail. It depends how much money is involved, but, even if they say they don't care, they probably do. When borrowing money from friends or family, all of you sign a paper about how you are going to repay this loan and whether they expect any interest. Good luck THIS CAN BE VERY TRICKY, FAMILY DOES WANT TO HELP
AND SHOULD HELP.BUT IT CAN ALSO BE VERY TRICKY DUE TO THE FACT NOW THEY HAVE SOMETHING TO HOLD OVER YOUR HEAD AND TRUST ME WHEN I SAY THEY WILL USE THIS TO THERE ADVANTAGE. OH, I NEED THIS CAN YOU HELP? AND WHEN YOU CAN'T THE ISSUE BECOMES, BUT I HELPED YOU WHEN YOU NEEDED IT.. TREAD CAREFULLY AND REALLY THINK IT THRU, ONLY YOU KNOW YOUR FAMILY. LOOK BACK AT OTHER FAMILY MEMBERS AND SEE HOW THEY WERE TREATED... Your question is what my wife and I did to start our company. We have had a lot of problems dealing with her parents, wanting more control and say-so with the day-to-day ops in the company. Normaly I would understand, they invested a lot of money in this company, but they have no knowledge of healthcare, and healthcare management. It has caused a lot of problems for our company. Now we are selling our company and use the profits to start a company with just myself and my wife as owners. So, good luck! Sometimes you have to so what you need to do to get going! pros - yay, money - quick fix
cons - the strings - they can be wrapped around you, sometimes they are loose and at other times they can be cinched.
Blah, blah, blah - they always have an opinion and are second guessing you - they always know best. You always have the monkey on your back. Will you have control or will they? PROs - Little to no interest charges; no [lengthy] loan applications; no credit check(s); flexibility of terms; ability to modify the loan amount (line of credit).
CONs - Difficulty in distancing oneself from the lender; possibility of unconventional or inconvenient lending terms or other awkward conditions; lender's belief that he/she is knowledgeable in the affairs of your business; strained relations, if the venture becomes unprofitable, payments are late, or if you default; loss of privacy in regard to your personal finances. Pro NONE
CON Everything- the last person you ever want involved in your business or personal life in anyway is a family member.
I am sure some have worked out just fine, but most, and speaking from second hand experience, it is definitely not the place to ever be.. if you want to be used, taken advantage of, have something always over your head then go right ahead and use your family. But it is always better if you can do it on your own.
If you do do it with a family member, keep it as legal as you would any other loan... best advice I can give.. Good Luck you are giving them access to the financial aspect of your life:
thats a pro and a con; at the same time.
the fact that you have to ask means that you have doubts of doing it. | 