I read a ton of blogs and articles about personal finance and business. I listen to a bunch of personal finance podcasts. And I talk a lot with regular folks and supposed “experts” on personal finance. Yet once in a while I’ll be surprised at some of the information that’s being disseminated. Today was one of those days.
Entrepreneur.com recently posted an article about funding a business that included the following quote, from Tonia Papke, president and founder of MDI Consulting:
Family and friends are great sources of financing. These people know you have integrity and will grant you a loan based on the strength of your character
Seriously? We’ve talked about lending money to family and friends before. I just had to talk about this again from the “borrowing” and “business” side when I saw the article. For the same reasons that I don’t think it is a good idea to lend money to friends and family, I think borrowing money from friends and family is just not smart (to put it lightly).
I get what they’re saying – don’t get me wrong. I get the point – if no one else will lend you money you can ask family. And yes, it’s true. Your family may lend you money when no one else will. But stop and think about that for a second… there might be a reason no one else will lend you money.
But my take on borrowing money from friends and family to start a business basically boils down to this:
- An incredibly high percentage of businesses fail within the first few years;
- Borrowing money to start a business creates a very risky situation because, especially with new businesses, you’re often required to personally guaranty that you’ll pay the money back – even if you ditch the business;
- Because of this additional risk, small business owners often make business decisions out of fear of not being able to make short-term payments instead of based on what you believe is best for the long-term prosperity of your business;
- And borrowing from family and friends brings all of this risk home with you.
Basically, it’s risky to start a business. It’s even more risky to borrow money to start a business. Don’t bring that risk home with you or to Christmas dinner. It won’t taste very good.
The article makes a few good points regarding some of the complications from lending to family and friends. Specifically, Papke warns that:
- Your family members or friends may think lending you money gives them license to meddle; and
- If the business fails, the issue of paying the money back can be a problem, putting the whole relationship in jeopardy.
Trust me on this: There are hundreds of more reasons that it’s a bad idea. There is probably one reason in the “pro” column and that is “it may get your business started sooner.” (It may also make your business end sooner…).
So why would you want to do this? If this is the only way you can fund a business, maybe you’re just not ready. Maybe you need to grow slower. Start from home selling by word of mouth. Have a few products made and order more only as you sell them. It’s OK to grow slow. You’ll be focused more on your business than your loan and your family. If borrowing from your family is the only way, you’re not ready. It’s OK.
So please don’t borrow money from family or friends to start a business. No matter how much money “they have” or how much they “believe in you,” it’s a recipe for disaster.
I’m sure I’ll hear from a few people who borrowed money from family to start a business, paid it back and are making good cash now. But trust me – that’s the exception, not the rule.
And, of course, put your credit card down and slowly step away from the mall!
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