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All You need to Know About Borrowing Money from Family

Borrowing money from family and friends can be a perfect solution, but be sure to look at the pros and cons of this approach. Before you join the bandwagon, review first this short list of its advantages and disadvantages.

The Pros
  • Flexible Terms: Unlike other forms of traditional finance, funding from family and friends is typically offered on flexible terms. Friends and family may agree to a longer repayment period and may seek a lower rate of return than traditional lenders. On a practical level, little or no security is required and the repayment can be tailored to your financial projections.
  • Minimal charges: One of the greatest advantages of borrowing money from friends and family is that the funds are offered at little or no interest. As a start-up or loss-making company, the interest rate charged by traditional lenders can be very high.
  • Easy to set-up: On a personal level, the family member or friend already knows your ethos and business circumstance and so are less likely to demand a detailed business plan.
Source: UNSPLASH
The Cons
  • Family feuds and friendship squabbles: One potential downside of borrowing from friends and family is that slow or non-payment can fracture relationships on a personal level. Losing the friendship and support of loved ones should mean much more to you than the initial sum borrowed in the first place.
  • Who’s in control? There is a real risk when borrowing from family members; the individuals may feel that they are now part-owners of the company, with a right to make business decisions. You can avoid this by stating in the loan terms that you will be in charge of the day-to-day operations of the business.
  • Less stability: Family and friends can sometimes demand quicker repayment prior to the arranged terms (due to personal financial issues), whereas bank and other independent lenders have more stability.
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