In the past year, approximately one in 10 new entrepreneurs borrowed money from family and friends to start up their new business. If you’re thinking of going into business and can’t get the necessary capital from a bank you might want to go the same route. However, you should let the family and friend know what the ground rules are. If you borrow from them to start your business, be generous financially in what you plan to return to them for trusting you with their money. Keep in mind that startups are highly risky and that only 50% of them survive during the first five years. The interest rate you pay to your relatives and friends should be commensurate with what you would pay a bank or other financial institutions. Be up front with them about the odds you face. Wayne Rivers of the Family Business Institute advises not to pay too little interests as it could foster ill feelings and frustration.
What you don’t want to do is give them a voice in any business plannings or decisions. A bank would have no say so over your operation so why give it to Cousin Emma or Uncle Roberts? Make it clear to your friends and relatives that they won’t have any input in your business decisions nor will they get any equity stakes in it. Then put everything in writing to avoid conflict. Create a contract that spells out the terms of the loan(s) and let them know that this is a professional business decision and not one that is personal.