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Entrepreneurs and funding businesses: Think before asking relatives to play Santa

ROHIT_optBY ROHIT ARORA
CEO, Biz2Credit

As families gather for the holidays, aspiring entrepreneurs might consider asking parents, grandparents or other wealthy relations for capital to fund a business.

But is "family funding" a good idea?

Maybe.

Considerations include how involved the family members going to be in the company, the financial situation of those who are backing the venture, and the relationships between the borrowers and lenders.

Advantages of Family Investors

*        They are not going to conduct rigorous background checks or review credit scores.

*        Relatives may be willing to do you a favor, banks are not.

*         Loans are often made at zero interest.

*        Relatives will likely be more flexible in their repayment timetable.

*        Family members will care about the long-term success of the business more so than an outsider will.

Challenges of Family Investors

*      Unsolicited advice from kinfolk.

*         Borrowing money can strain relationships.

*         Children who borrow from parents may feel as if they can never cut the apron strings.

*         Relatives, particularly extended family, might just be as demanding as a bank - especially if things appear not to be going well.

Things to Consider

  1. Put the agreement in writing and spell out the specifics -- amount borrowed, payment time frame, percentage of the company, if any, the lender will own.
  2. Spell out what happens if the business fails or if the founder dies.
  3. Will the loan impact inheritance?
  4. Lending to a family member can become very complicated if the business fails.  Consider how failure of the business might complicate family relationships.  It can certainly ruin a holiday meal!
  5. Always remember that a loan from a relative is still a business agreement.

If you balance the pros and cons and are still unsure, then it might be best to seek outside funding.  There are plenty of small banks, credit unions, and alternative lenders who are making cash available to small business owners.  Use the internet to search for a business loan and find the best deal at the most attractive interest rates.

Rohit Arora is co-founder and CEO of Biz2Credit, an online resource that connects 1.6 million small business owners with 1,100+ lenders, credit rating agencies and service providers such as CPAs and attorneys via its Internet platform.  Since 2007, Biz2Credit has secured more than $750 million in funding for small businesses in New Jersey and across the U.S.

 

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