Why Asking Your Family And Friends For A Loan Is A Bad Idea

The hardest part of getting any small business off the ground isn’t coming up with a concept, but coming up with the funds to back your new venture.

Asking for money, especially as an investment in a new business, is difficult – on top of a lengthy application process involving plenty of legwork to prove the validity and potential of your idea, lending institutions and venture capitalists expect prompt repayment regardless of the success of your business. With all these financial hurdles it can be tempting for new business owners to by-pass the institution and borrow money from their friends and family instead.

We admit there are a handful of benefits that go along with borrowing from people you know. For instance, friends and family are less likely to require you jump through hoops in order for them to hand over a cheque, especially if you don’t have a history of “using and abusing” financial relationships. You get your money faster, without the hassle of background and credit checks. You also have the option of working out how much interest you’ll tack on (if any) as well as a repayment plan that is suitable to both of you.

Despite those few pros, being on either side of this tricky equation can be sticky, especially if (and / or when) things go awry. Whether you opt for a simple loan or decide to offer a percentage of your company in exchange for funds to cover the start-up costs, the consensus is clear: the financial involvement of friends and family won’t end at the wallet. Are you prepared to accept more than just money?

In the best of circumstances, you’ll run into interference in the form of unsolicited advice or opinions on what you do and how you do it. When borrowing from an institution, the position of the lender is clear – their involvement with your company is expressly financial. However, without a contract that stipulates rules and expectations of the parties involved, you run the risk of facing unwanted claims on various aspects of the business, including claims on revenue to interference with business decisions.

In the worst case scenario, your business folds. Though the idea is to be repaid in full, lending institutions are insured against situations where money is either late or not-forthcoming. Personal loans, however, do not benefit from such insurance, and when your business goes under, you are not the only one in the red. Even if your friend or family member is capable of forgiving the loss, friend and familial relationships aren’t built to withstand hefty financial obligations. Is your small business worth the potential damage to those close family ties?

Borrowing (and loaning) money is not for the faint of heart. If you must borrow from family or friends, do so as a last resort. Crowd-funding involves soliciting funds from the public to produce your product or service, without offering up part of the business as collateral. Many individuals have been able to successfully fund their projects through crowd-funding.  If it’s possible to raise over $50,000 for potato salad through crowd-funding, think of the support you can get for your brilliant brand!

For more information on funding your small business endeavour, contact Capify today – We work with all types of merchants including restaurants, automotive dealers, local retailers and other Canadian businesses across a variety of industries. We also service a variety of credit situations, so even if your credit isn’t perfect, there’s a very good chance we can still help.

Disclaimer: A merchant cash advance is the purchase of future credit card or debit card sales and is not a loan product.