It's All Relative
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Question: I've been turned down for loans by several banks because my business is a startup and I have no experience in the industry I want to enter. Should I try asking relatives to lend me the money instead?
Answer: Borrowing money from family members can be a double-edged sword. On one hand, it's only natural for first-time entrepreneurs to seek funding from the people who have known them the longest and have the greatest motivation to see them succeed. Relatives are also generally more patient than banks, commercial lenders and professional investors when it comes to recouping their capital and making a return on their investment.
On the other hand, if your business goes under and your family members lose their money, you may find it difficult to face them at the dinner table next Thanksgiving. That's why Kenneth Shapiro, who works with family-owned businesses as a wealth management advisor at Merrill Lynch in New York City, recommends that you document your family's loan or investment just as you would any investor's. Doing this can avoid hurt feelings down the road. Whether you hire an attorney to help you or simply download a form from the internet, you need to specify terms and conditions, such as how much money each person is investing, if you'll pay interest and how much, and what happens if you fail to pay them back. "Before taking [your relatives'] money, make sure they understand the risk and can afford to lose 100 percent of what they give you," Shapiro explains. To sweeten the deal and reward your family's faith in you, you may also want to throw in an equity kicker to give them a share of the upside if your company turns out to be the next YouTube.Rosalind Resnick is founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses.