Small Business & Family
I was commuting home (as I often do) on the boat the other day with a group and the topic of families, money and business came up. Because the Seattle area has lost of ton of large employers, many ex-employees are feeling out the idea of going it solo. If this isn't scary enough, many are unemployed. So, where does the new innovator procure some dough if they want to fund their marketing budget? If venture capital requires more than you see yourself doing and your credit is iffy, would you ask your friends and family?
The group I was sitting with were split. Half of them felt that asking their family would be the ultimate sacrifice. They would feel weak and vulnerable and as if their families would own a part of their soul. Others in this camp also lamented that they wouldn't want to put their families at risk that way. What if things went sour? What if you lost the business? Where would the money to pay them back come from?
The other half argued that they would want to give their family first crack at their success. They would get in at the ground level and therefore have a vested interest in seeing you succeed. They would also be far more forgiving (hypothetically) than a financial establishment.
To borrow, or not to borrow... What do you think?
The group I was sitting with were split. Half of them felt that asking their family would be the ultimate sacrifice. They would feel weak and vulnerable and as if their families would own a part of their soul. Others in this camp also lamented that they wouldn't want to put their families at risk that way. What if things went sour? What if you lost the business? Where would the money to pay them back come from?
The other half argued that they would want to give their family first crack at their success. They would get in at the ground level and therefore have a vested interest in seeing you succeed. They would also be far more forgiving (hypothetically) than a financial establishment.
To borrow, or not to borrow... What do you think?
Labels: marketing, small business
posted by Maureen Jann: Internet Junkie at
3:14 PM
3 Comments:
I'm solidly in the camp that believes one should not lend to or borrow money from family members. But, I think the question posed here could be about equity vs debt.
Offical ownership in your company is a slightly different (and legally) more complicated proposition than just borrowing money. Do you offer family members shares and a potential return (or loss) on those shares? This typically would entitle them to some element of influence on how you run the business? Also, with equity comes risk. If the business fails, your investers assume the risk of losing that money with no guarantee of getting it back.
Borrowing money, on the other hand, does not give your debtors any amount of control over your business. Your bank doesn't tell you what you can do with your line of credit or tell you how to run your business. But, guess what? You have to pay them back, with interest, even if the business fails.
There is a third option -- a no strings attached gift. In 2009, your parents can each give you a tax-free gift of up to $13,000. And if it's a gift, your under no obligation to either pay it back OR pay your parents a dividend.
So ultimately the question becomes not only IF, but HOW do you want to engage with your family and friends? In any case, one should define those rules of engagement upfront and document them in a legally binding contract.
Keith, I think the IF and/or HOW question really begs for more exploration. As we all know dealing with family is not as cut and dry as dealing with the bank.
If a bank approves your loan, they offer it based on a financial and quantifiable personal history. If a family decides to lend you money, does that mean that they believe in you and your concept as well as some consideration to your financial history?
If your bank tries to control your business (with financial decisions, and whatnot) it's probably because you've in some way defaulted on the loan/line of credit. With family, you don't have to default for family to feel they have some sort of control because they offered financial support.
So, What's the real cost of having your family involved in your business? What's the real cost of having the bank involved in your business? And what weighs out the most?
If I was certain that my business venture had a real shot at success, my parents and Beth's parents would be the first people I'd talk to about raising equity.
I would never ask my brothers and sisters or aunts and uncles, however.
I wonder if it's because I still feel like my parents really want to "invest" in me and would OK if the business failed. They'd not only love me, they'd probably help me try again.
I'm not so sure that any of my other family relationships have the sort of strong parent/child bonds that would allow them to be so giving and free with their finances. Therefore I'd see business relationships with any of them as a risk to those relationships and I wouldn't want to borrow from them because of the potential damage that could be done if things went south.
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