Remember as a teenager you would probably ask your parent(s) to “borrow” money to go to the mall, movies or purchase something you admired for what seemed like forever. With this request, you probably were greeted with responses like: ‘I will give you some of the money, but you must earn the rest’ or ‘How are you going to pay me back the money you are borrowing”. I am not sure why the word borrow was often used but let’s be real, how often did you really pay your parents back.
The term borrow is a very interesting word. According to dictionary.com, borrow is defined as taking and use (something that belongs to someone else) with the intention of returning it. As a teenager did you really intend to borrow money from your parents or were you saying whatever you thought would increase your chances of getting the money you wanted to see that movie, got to the mall or purchase something.
Borrowing money as a teenage to invest in your hobbies and wants is completely different that borrowing money as an adult to invest in a business venture. I highly doubt that your parents stopped speaking to your because you never repaid the money you borrowed to buy the sweater you just had to have. I also doubt that your friend or cousin unfriended you on social media because you never repaid the money you borrowed for pizza.
While those scenarios seem trivial and petty, it is never either when it comes to those very same people investing in your business venture. Yes, those close to us want to see us succeed. Yes, these very same people will cheer us on along our journey. And yes, a couple of right arms would be given to assist us along the path to success. However, things may turn extremely ugly when there is a bump in the road, or your business venture has fallen into a ditch and lying next to the venture is the money of your friends and family members.
Receiving money for investing from friends and family has some perks. For one, you get to avoid the most dreaded process of securing money…dealing with banks. Two, you get to set your own terms and guidelines on how the money will be used. Three, you will most likely receive the money much quicker than you would from a bank. And four, if needed, the ability to adjust the repayment deadlines may be a little bit more flexible with much less harsh repercussions.
While all those perks may paint a picture of borrowing from family or friends ideal…well, it is not. For every perk, there are at least two disadvantages. Yes, you get to avoid the banks, set your own terms with a soft repayment plan. This would be an entrepreneurs’ utopia, however, if things should ever not go according to plan the perks would quickly fade and be replaced with an unimaginable nightmare.
Could you imagine your parents, cousin, uncle or close friend whom you have had a lifelong relationship with abruptly stop speaking to you? Could you imagine being uninvited to your best friends wedding? Even if you were the maid of honor or best man. Could you image a Christmas, Thanksgiving or Birthday without those you love? How about being the recipient of unpleasant text or voicemails from these very same people.
If you should ever default on a loan with the bank, you never have to worry about running into them at the supermarket resulting in an awkward and negative exchange however that is a plausible situation if you default a financial agreement with a family member.
While doing business with family may have good intentions for both parties, remember that entrepreneurship is a risky avenue and if you are not comfortable with gambling the future of your relationships, then keep your financing formal. It is important to remember that within the realm of business and entrepreneurship the only feelings that should be allowed is your passion for your business.