Blood Money: Managing Business Loans Between Relatives

Sometimes a family member is the most obvious source of start-up capital for a new business venture. And despite the potential strain such a transaction could put on family ties, it needn’t be a negative experience. If both parties focus on the rational, business aspects of the deal, there is a greater chance that the personal — and financial — relationships involved will emerge intact.

Here are some tips for both borrowers and lenders to consider.

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  • Don’t pressure the lender to say “yes.”
  • Volunteer full disclosure, including a business plan, financial statements, etc. A family member may feel uncomfortable asking for these documents.

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  • If you don’t want to lend money, say so directly and then stand your ground.
  • Put everything in writing in the form of a legal contract. That way, the borrower will be reminded that the money is a loan — not a gift.
  • Let the contract be your guide when it comes to handling late payments (and assessing late fees).
  • Apply the same scrutiny to this information as you would to any other financial transaction.

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[panel-header][iconheading type=”h5″ style=”fa fa-user” color=”#ffffff”] Both Parties[/iconheading][/panel-header]
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  • Recognize the potential consequences to the family relationship if something goes wrong and the loan goes unpaid.
  • The loan may or may not give the lender a voice in the running of the business. Come to an agreement on that point up front and respect the decision.

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To learn more about extending loans or lines of credit to a family member, contact your business banker or a trusted financial advisor.

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