People often ask if they should use friends and family loans/gifts to buy a business. The answer to that, and to many questions in life is – it depends.
If you have friends and family that have money available to lend to you, they can be a great source to help you further your dreams and buy a business. But be careful, there could be hidden problems when getting money from your rich uncle.
Borrowing from friends and family
Friends and family are probably the easiest and fastest way to get financing unless your family really puts you through hoops to get the money. Many times friends and family lenders will give/lend you the money with a minimal amount of paperwork and legal hassles.
Remember, most times they are lending you money because they believe in you and want to support your dreams
Other times they may require contracts, agreements, and financial reviews. In my opinion, when borrowing from friends and family, you should still use some kind of contract or lending agreement that clearly spells out what is going to happen, when/if they will get repaid, and what the money will be used for.
Always remember to respect the person’s decision. If the person you’re asking to borrow from decides not to lend you the money, it’s important to respect their decision. It can be tough to hear “no,” but it’s important to remember that everyone has the right to make their own financial decisions.
A good source for do-it-yourself loan agreements is Rocket Lawyer which has free and paid versions of loan agreements you can create on your own and download.
Expert Tip – I once had a relative ask to borrow money to start a business with a boyfriend she met 3 months ago. That was a hard no. Beware of these types of situations.
When a friends and family loan goes bad…
Borrowing from friends and family can go wrong real quick. And when it goes bad, it gets bad!
Remember, most of the time these people are helping you achieve your dreams, but that does not mean they don’t want their money back if you said you would return it to them.
I have seen lifelong friendships ruined and family reunion fights and potato salad thrown over a few thousand dollars that someone did not repay.
You need to be willing to possibly lose that relationship if the business does not work out and you don’t repay the loan.
If you feel the loan is at risk of not being paid back it’s important to make sure you communicate openly and honestly about any issues that come up, and be proactive about finding solutions.
Go deeper on business loans
If you decide to borrow money from friends and family won’t work for you but you still need to get financing, you may want to consider a bank loan. How To Get a Business Loan is a super helpful book that tells you the tips and tricks to getting a loan from the bank.
This book is written by an actual bank loan officer so it has great info.
Click on the book image to learn more.
Final thoughts on borrowing money from friends and family
So, the short answer is…. maybe. The key in this scenario is clearly outlining what each party expects. You have to understand why someone is supporting you and clearly spell out when/if they will ever get their money back.
If you can get everyone to understand what they are getting into, the easier this will be for you. Getting financing to buy a business from friends and family can really enable you to quickly close on a business you want to buy.
By following these tips, you can help ensure that the loan is a positive experience for both you and the person you borrow from. It never hurts to ask them, they can only say no.
Now go out there and change your life!
