I just got finished doing a radio program on the topic of Bootstrapping your Business in a Low Investment Capital Economy. One of the questions was, "Should you attempt to get some of your start up money from friends and family?"
This got me thinking...
Let's assume you have borrowed money to get your business started. You received a cash injection from a friend of the family to keep the business going. You grew your business with money from your in-laws. Regardless of where the money went, you borrowed money from your family to keep your business in hand. Now, your spouse wants you to pay those funds back. The problem is: your business can't afford to do so right now. So...here comes the friction! What do you do?
Even though most friends and family members that invest in a relative's business, do so to help the person out, they still expect to receive their money back. The most scrutinized business is the one that has borrowed from family. For starters, you should avoid this whenever possible. If you do borrow from family, it needs to be seen by both parties as an investment. And, you should have a contract drawn up whenever it is possible. The reason for doing all of this is quite simply to protect your investment in the business as well as your family's money. What's done is done, though. How do you move forward in a situation like this?
A good place to start is with a conversation between you and your spouse. Compile the profit and loss statement from your business or your cash receipts. Talk about your ability to repay the money right now and why it might not be able to happen immediately. At the same time, communicate with your spouse that you desire to, and have every intention of paying the funds back. This alone may help to settle a few nerves. The next step is to determine how to put a plan in place.
Let's assume that the business is strapped right now and you can't afford to repay even a small portion of the funds. Here are some ideas:
· Communication is key. Saying nothing to your spouse or avoiding your "loan officer family member" is the worst thing you can do. Discuss the near future and when you foresee being able to repay the funds to the family member.
· Develop an action plan for either increasing profits or decreasing expenses. The goal is to come up with 10 percent, 5 percent or another percentage of the owed amount to pay back per month. Find ways that the business can repay the funds over a timeframe. There are always areas to cut, and taking that small amount to pay back the loan is showing good faith.
· When you can't find a way to repay in the short term, it is time to talk with not only your spouse but also the person who has invested in you. Be frank and polite. Let everyone know your willingness to repay the funds, but work with them to come up with a repayment plan. They may be fine with allowing another six months to pass without repayment. You may want to tack on interest for the increased investment. OR...if there is significant upside to the business, they may be interested in converting the loan to equity ownership in the business. Warning! Having a family member as a business partner is not always a good idea! Caution is advised in this scenario.
Lay down terms for repayment in any situation. If family can't wait for the investment, you may have to borrow the funds from another source. If the business won't turn a profit for some time, the investor should be warned of such a situation.
The worst thing you can do is to let the problem continue to develop. You don't want there to be a rift between you and family or your spouse. Make sure everyone is on the same page and working towards full repayment.
Lastly...After you've had enough of that icky feeling in your stomach every time you see your rich Uncle Henry at a family gathering, let those feelings serve as a reminder to avoid borrowing from family in the future.
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