Business Funding: Playing the Family Card

Posted on 24. Mar, 2011 by Luke Etheridge in Business, Entrepreneurship, Productivity

You have this awesome idea for a business…

…You’ve performed your due diligence: you know there’s a market for your idea; you’ve researched the competition and know how you’re going to best them; and you’ve run the numbers and are sure you’ll see mad profits within a year. Just one problem…

…you don’t have the money to self-fund your venture.

And you know that startup capital is by far the most difficult funding to get from traditional sources. But wait! Your parents (or grandparents, or Uncle Charlie) have some money put away. What about asking them to help you?

Plenty of entrepreneurs – who are often speaking from personal experience – will tell you that borrowing money from family to get your new business off the ground is never a good idea. In fact, many could tell you horror stories about how their families were ripped apart by someone loaning someone else in the family money for a business venture that didn’t work out.

Is such a scenario inevitable though?

You don't want things to get too messy!

Or is there a chance that the majority of those tales of misfortune are the result of the borrower and lender not going into the lending relationship in a way that decreases the possibility of conflict and increases the chance for a harmonious outcome?

Below are four questions that need to be answered if borrowing from family is your only option for starting your business. Answering these questions and taking the steps suggested doesn’t guarantee there won’t be issues, but it will reduce the likelihood of someone not being invited to Thanksgiving dinner!

1. Have you really covered all your bases?

This is a question every entrepreneur needs to ask, whether borrowing from family or not. Some of us have a tendency to get really excited about a business idea, and we can become blind to potential challenges. Before you ask mom and dad for ten grand, do whatever it takes to look at your idea objectively and make sure you can identify potential obstacles – and that you have a plan for overcoming them.

2. Do you have a compelling proposal?

Just because you’re dealing with family, and not a bank, doesn’t mean you shouldn’t create a formal proposal and business plan to walk through your idea in detail and spell out what you’re asking for, your plans for growth, and your plans for repayment. Give your family member the respect of treating the transaction like a real business decision. Not only will this help to separate the business relationship from your personal relationship, but it will increase the chances of them wanting to help you in the first place.

3. Can they afford to lose the money?

The biggest reason people approach family members over a bank or VC is that they’re more likely to say yes. Unfortunately, some will even say yes when doing so might mean financial peril if things don’t go as planned. If you’re asking your grandmother to invest her entire life savings, you’re taking a much bigger risk than when you take out a loan from a bank. You might have a fantastic idea, but you can’t predict what’s going to happen in your industry, the economy, etc. No one’s looking to stick the bank with an unpaid debt, but they won’t have their hearts broken like grandma might.

4. Are you and your family member both willing to sign a formal deal?

Just as with your proposal and business plan, a formalized loan agreement helps to separate personal and business relationships. It also makes sure that everyone is on the same page. If your family is like most, people don’t always say what they’re thinking. Putting it all in writing will avoid assumptions and misunderstandings. Having a lawyer draw up the agreement is best. It will cost some money, but the strife it might avoid down the road will be worth it.

Bonus tip!…

Keep communicating. While it’s not something we like to think about, we all know there are no sure things. You can have the best intentions, the best laid plans, and formalize everything, and your venture could still fail.

The key to keeping the family together is communication. If things aren’t going so well, it can be difficult to tell the person who lent you money, because you don’t want to worry them. But they deserve to be kept in the loop and told the truth. They’ll respect you for it, and it will go a long way toward making things less traumatic if the business fails.

No one likes to be surprised at the last minute with news that their investment is lost. That’s the kind of thing that will have you eating Thanksgiving dinner at Denny’s!

Have you had experience (good or bad) with borrowing from family for your business? We would love to hear from you so please share your story in the comments.

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Tags: business funding, business investment, family business, family business venture, family investment, family investors, finding an investor, ways to start a business

11 Responses to “Business Funding: Playing the Family Card”

Danny @ Firepole Marketing

24. Mar, 2011

Having taken money from family to start a business, I’d like to weigh in.

Yes, make absolutely sure that they can afford to lose the money, and yes, be sure to explain the risks to them. Tell them that even though you’re confident in your venture and you’ll do all that you can to make it a success, the statistics say that at least 80% of new ventures fail, so they have to be prepared for that possibility.

Yes, be sure to communicate all the time – just because they’re family doesn’t mean they aren’t investors just like any other, and you have to put the time into investor relations that you would for anyone else.

All that being said, I’d add two things to the post:

1. If at all possible, this shouldn’t be the first money into the business. You should have skin in the game, and ideally you should have at least a small amount of money from another source. If you aren’t comfortable asking anyone else for money, why should you be comfortable asking your family.

2. Recognize the unbelievable amount of pressure that you will be feeling once having taken money from family. Even in the best case scenario, where everything goes well, expect to lose an awful lot of sleep during the coming years because of the risk that your family has taken for you. And this is compounded – a lot – if things don’t go well.

Those are my two cents. :)

Reply to this comment
- Luke Etheridge
  
  28. Mar, 2011
  
  Hey Danny,
  
  What can I say!? what a great comment and addition to this post :)
  
  I completely agree – this is STILL a business relationship, even though you are family. Being family does not really change much at all because if they are giving you the same funding that an investor would, then they need to be treated as an investor: professionally!
  
  I have never had funding off of my family (I think they might laugh in my face if I asked!) but I am sure there is a HUGE amount of pressure – probably 10x the amount from an ordinary investor.
  
  It’s good to hear from somebody who has experience with family funding buddy, I sincerely hope that it went well for you buddy.
  
  all the best!
  
  Luke
  
  Reply to this comment
Alexis

24. Mar, 2011

Not only borrowing the money from family for business is not a good idea but to even talk to your family about your new business.This may be personal but from my experience family and business does not not work well.

Reply to this comment
- Luke Etheridge
  
  28. Mar, 2011
  
  Hey Alexis,
  
  Sounds as if you have had a bad experience from family funding? I personally think that it is healthy to talk about business to your family as I know from experience that speaking to my girlfriend about certain decisions etc have helped me to see things clearly and come to a conclusion.
  
  Sometimes I feel that having an outsiders perspective can really help – not always, but in some situations it can be beneficial.
  
  Thanks for your input Alexis and please feel free to enlighten us of your bad experience with family funding as I am sure we will all learn from it.
  
  Luke
  
  Reply to this comment
Dave Grimes II

24. Mar, 2011

Ah, to have family with money… if only.

While unfortunately this isn’t an option for me… having the (non-financial) support of my family has been absolutely vital to the successes that I’ve had. Everything you’ve mentioned here for gaining financial backing from family is equally useful is getting feedback, encouragement and other help from family. To me, that is just as valuable as getting financial aid from family!

Reply to this comment
- Luke Etheridge
  
  28. Mar, 2011
  
  I second that Dave!!
  
  Encouraging words from family has always been one of my most valued assets ;) Sometimes money will never give you that encouragement and in many cases can throw you off balance.
  
  Loved your comment buddy and it’s great to have you around Dave.
  
  Thanks,
  Luke
  
  Reply to this comment
Cheryl

26. Mar, 2011

Financial support is not always an option from family. Our son wanted to start his own business. Instead of funding, we provided him with expertise and time to help him get started. Now with the business more established, it will be easier for him to get external funding.

Reply to this comment
- Luke Etheridge
  
  28. Mar, 2011
  
  Similar to Dave’s comment above, I loved reading this Cheryl because it is exactly how my parents have treated me.
  
  Yea I have had to go out and learn a lot for myself, but where would I be if it was handed to me on a plate! :) My parents have always said ‘anything is possible’ and without sounding cheesy they’re right!
  
  You just need to get yourself out there, throw yourself in the deep end, LEARN and build on your knowledge everyday!
  
  Thanks for your comment Cheryl!
  
  Luke
  
  Reply to this comment
Lakhyajyoti

27. Mar, 2011

It is too risky to take money from family.Because most of the new business ventures fail and family may not be ready for such situations.So they must aware about such situations.

Reply to this comment
- Luke Etheridge
  
  28. Mar, 2011
  
  Hi,
  
  That’s exactly the point made above – both parties, family or not family, need to be FULLY aware of the risks involved.
  
  As Danny said: 80% of new business ventures fail and they need to be aware and ready for that possibility. There is no point avoiding that conversation just because you have faith in your venture because it really can happen to the best of us!
  
  Thanks for your comment – all the best!
  
  Luke
  
  Reply to this comment
Alejo A

06. Apr, 2011

Its very Important have ONE vission as family, I mean, the same dream, the same goal, so all they are gonna work for the same reason, with the same passion. I read in a book an excellent way to share out money. That way is:
- 10% Helping people
- 10% Education
- 10% Saving money for future security
- 10% Saving money for a new business
- 50% Debts, home costs and other!

By T.Harv Eker.
Regards!

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