When you start a business, should you borrow money from your parents? Borrowing money from your parents can be both a blessing and a...
"We've always encouraged young people: Take a shot, go for it. Take a risk, get the education, borrow money if you have to from your parents, start a business." --Mitt Romney
Political preferences aside, Mitt Romney's encouragement to young entrepreneurs is something that some of you may have contemplated. When you're ready to start a small business, but need funding to get it off the ground, should you borrow the money from your parents?
Surely, they're likely to be flexible with you on payment terms, and will give you all the emotional support you need when starting a new endeavor, but borrowing money from your parents can be both a blessing and a curse.
Let's take a look at the pros and cons:
- They may give you more lenient terms for payback, including lower interest rates and waived penalties. This is one of the more significant reasons to borrow money from your parents vs. obtaining an inflexible bank loan. Even if this is the case, you'll want to approach the agreement with a signed promissory note (that's been looked over by a lawyer), and will need to establish a payback schedule that you can adhere to. Just because you don't have late fees does not mean you should take advantage of your parents' generous loan.
- Your parents, whether they've invested or not, want to see you succeed. When you borrow from them, their money is on the line, and they'll likely do everything within their means to help you reach your goals -- making introductions to their network, acting as your extended sales force, or being beta testers for your product.
- Since your parents already know and trust you, they're likely to have more faith in your business idea and may not put you through the business plan wringer when deciding whether or not to lend to you. This doesn't mean you should forego this important step when planning to start a business, but it may make it easier on you to know that you're supported and your idea has merit.
- We're still crawling out of an economic recession, and they likely don't have much money to part with, if any. Through the last few years, many older generations lost a ton of money, and have had to rebuild their wealth while postponing retirement. If your parents are in this position, saving for retirement should be their priority over helping you. Remember that, as they age, they should also have reserves for health care and possibly extended home care, neither of which are inexpensive.
- Borrowing money from Mom and Dad could change your relationship with them. It's one thing to accept a monetary gift, but quite another to explicitly ask for a large sum of money to start a business. When you borrow money, they'll likely have questions about their involvement in your business, including what they will or won't have a say in when it comes to how you spend the money. Working with your parents on a personal, familial level is quite different from working with them professionally. You risk having heated disagreements and ongoing tension if there's money between you.
- If you are unsuccessful, you've just wasted your parents' hard-earned money. Banks hedge their bets with small businesses, and can help you to determine how much money you truly need for start-up costs. It's likely your parents have neither the insight nor the resources to compare your likelihood of success with other small businesses like yours. They may also feel obligated to make an investment based on your personal relationship, even if they can't afford to lose it.
Regardless of where your funding comes from, it's important that you make smart business decisions, like these recommended on WiseBread.com. Otherwise, it doesn't matter where your money came from ... parents or otherwise.
Are you a believer that money and family don't mix? Or have you successfully borrowed money from your parents to start your business?
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