Question: My parents and other relatives have offered to lend me money for my new catering business. Should I take it?
Answer: Of course--but only if you can answer "yes" to the following questions:
- Do they really understand there's only a small chance of ever getting their money back?
- Can they lose the money without endangering their lifestyle or financial security?
- Will they invite you to Thanksgiving dinner and share Christmas with you after a loss?
- Will you give discounts and cater family parties for free?
Money from relatives carries a high emotional cost and lots of unintended strings. You'll feel guilty about using this money. Never do a "let's shake hands on it and you pay me back when you can" deal. It creates too many misunderstandings later about who said what, who heard what, and what was really intended.
Make it a professional arrangement, just like a bank loan. Sign a note. Pay a fair market interest rate. Also write a separate letter of understanding. This letter stresses the risk of your business and of the loan; that it is a loan, not ownership; and that you are obligated only to repay the loan. Sign the letter and have them sign it, too. Your lawyer should bless the paperwork beforehand.
Later, when you're working yourself to death on the business and they come around to pester you, hold up the letter and say, "Here's the deal. I'm current on the note. I love you. Please leave me alone." Practice saying that--right now.
Finally, as soon as you can, pay off the loan. Greed is only half a step behind love. Spending profits on yourself--a better car or a trip--before the loan is paid off will create resentment among your family. "There he is driving a BMW with my money!" Besides, your family took a chance on you when no one else would. It's only fair to pay them back before you reward yourself.
George M. Dawson (firstname.lastname@example.org) is a small-business consultant and author of Borrowing to Build Your Business: Get Your Banker to Say "Yes"(Upstart Publishing, $16.95, 800-235-8866). Send him your financing questions at email@example.com.
PricewaterhouseCoopers Global Technology Group, (818) 673-4600, http://www.pwcglobal.com