Borrowing Startup Capital: The Family Dilemma

Today, I can guarantee that there will be at least two people thinking up a scheme for the “next best thing,” the innovation that will—supposedly—revolutionize an industry. The problem is, to launch these great ideas, you usually need fairly deep pockets to succeed – money, money, money. Traditionally, one of the best methods to obtain startup capital was through the major banks of your respective nation. These days, with the global economies’ volatility, and a convoluted business market, lenders offer high interest rates and less capital, which makes many entrepreneurs look at alternative options. The primary assumption, and mistake, is that family and friends, as your nearest and dearest, will back your venture to the bitter end—but many entrepreneurs find themselves bitterly disappointed by the reality of this prospect. 

Let’s go through the three outcomes of borrowing from your blood. 

When you get a loan from a traditional lender, like a bank, it can be a stressful process—you have to jump through a lot of hoops, you need a sound financial background, and you’ve got to fill out a lot of paperwork. The process is arduous, lengthy, and it could still end with a “no.” Borrowing from your family and friends alleviates some of this, with capital coming faster, with far less due diligence. And, to top it off, your loan terms will be far more flexible than what a bank could ever offer.

You can’t lose sight of why that is, though. If you go close to home for your startup capital, never forget that your family or friends are providing it as a favor. 

While there is a list of benefits, there are also some pretty bad aspects to financial assistance from your nearest and dearest. Imagine for a moment that your amazing idea is, in fact, not so brilliant, and it fails—at that point, it will have been a money sink, and that money isn’t returning. The problem is, that wasn’t your money to lose, and trust me, if you can’t pay your family back, it can be a sour point that haunts you for a long time. 

Another issue that arises, especially from family investors, is their tendency to offer more than just money. Once your grandfather’s money is on the line, you can guarantee that he’ll be checking out your progress like Hawkeye. It’s interference and additional noise that most entrepreneurs might need but do not want. It can muddy the waters pretty fast. 

Well, here’s the final inevitable bit. If things go wrong, and your business idea goes sour with money provided by family and friends, there’s a good chance that you’ll experience a lot of disputes. This will disrupt your home life and personal relationships. Mixing family and professional relationships seldom go well; this has been proven time and time again, and more often than not, you’ll lose the relationship through the professional issue. It’s just too hard to keep the two spheres separate in that scenario. 

If you believe that borrowing from your family and friends is truly the best route for you, then that’s fair enough—in some scenarios, the seemingly easy path is the one best taken. But for the sake of your relationship, make sure that you approach it in a professional agreement, rather than one bound by blood. Treat your family as you would a professional investor; prepare a quality business plan and show them exactly where their investment will go, and what the outcome should look like. And, whether you succeed in your venture or not, always return their money.