Your daughter wants to start her own consulting business, but she needs cash for start-up costs. Should she ask you for the money? Should you lend it to her?
It’s difficult to say “no” when a close family member asks to borrow money. If you’re thinking of asking for a loan or making one, having guidelines to follow may be helpful.
Before You Borrow
If you believe your business plan is a good one, present it to a lending institution first. The lender will evaluate your plan impartially and give you the loan if the plan has merit and you otherwise qualify.
But, if your only option is to approach your family, draw up a written loan agreement specifying an interest rate and time frame for repayment. Give your relative as much information as possible about your business plan so that he or she can make an informed decision about lending the money. A new business is a risky venture. Don’t accept money from a relative who can’t afford to lose it.
Before You Lend
Before you agree to lend money, judge the plan as you would any other business venture. Share any reservations you have with the borrower even if you plan to lend the funds anyway. If you decide not to offer to finance, tell the borrower as soon as possible without criticizing the plan.
Treat the loan as a business transaction. Follow the rules of the loan agreement with regard to late payments and other fees. Making sure your arrangement conforms to standard business practices will help separate it from your personal relationship with the borrower.
Remember that failed business dealings can affect family dynamics for many years, so consider the consequences carefully before you borrow or lend money.