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From the lender perspective, start-ups are a tough group. An entrepreneur with a great credit rating and another source of income can often get a loan, but when so few start-ups live through their fifth birthday, most lenders are reluctant to stick their neck out on a new business with no revenue, no collateral, and a business owner with a less-than-perfect credit score. Which is one reason, aside from dipping into personal savings, a loan from a friend or family members is a very popular way to get a new enterprise off the ground.
Although your generous Uncle Fred is a legitimate source of money, depending upon how the two of you handle the transaction could color your future relationship. There’s a reason these are often called Three-F loans (friends, family, and fools). If not taken seriously, these loans often become the catalyst for awkward family gatherings.
I’m convinced you should treat a loan from a friend or family member the same way you would treat any other type of loan. Granted, your father-in-law might protest with something like, “Just pay me back when your new business is profitable.” A kind and generous sentiment to be sure, but it has the potential to become problematic down the road. I suggest you formalize the arrangement—of course there are some decisions you’ll need to make:
Although they are one of the most popular ways a start-up entrepreneur finds cash to get his feet off the ground, it also has a huge potential for creating strife in a family. The easiest way to avoid the strife is to treat them seriously and avoid becoming cavalier with the generosity of your friends or family. Who knows, you may need to go back to the well again someday.
If you’re interested in seeing if you have any options for a small business loan, even if you’re a start-up, check out Lendio. Answer a few questions and we’ll match you to the best loan options.
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Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.
Blog
4 min read • Aug 11, 2022