Canadians don’t have an international reputation for friendliness for nothing – we’re often willing to do what we can to help others. So it comes as no surprise that when starting a small business, we turn to our friends and family for encouragement, support and sometimes even funding. At Lendified, we know that these relationships are the true backbone of running a small business, because we seek support from them on a daily basis as well. But when it comes to actually borrowing money from friends or family, there are certainly many things to consider before making the big ask. Let’s take a closer look at the Pros and Cons of borrowing from friends and family for your small business.
- Interest Rates:
Borrowing from family or friends can mean lower or even non-existent interest rates. This is a big draw for many small business owners seeking an alternative to the steep interest rates on loans offered by banks. The interest rate in this case, is in the hands of someone who is already invested in your success, but the rate can be still be variable, depending on what they see as fair.
As in the case of the interest rate, the entire borrowing process is flexible with friends and family. Each aspect of lending from amount to interest rates to payment duration is entirely determined by you, the small business owner and the informal “lender.” The flexible and informal nature of this arrangement also means there are no real consequences with your credit score or finances.
We’ve already highlighted how supportive the relationship is with friends and family. The bottom line is simple: They have your back and want you to succeed. So when it comes to borrowing money from family or friends, encouragement is already included in the deal, and they’re likely to go above and beyond to promote your business to their personal networks - something a traditional lender would not typically do.
- Personal Risk:
One of the biggest risks in borrowing money from friends or family is the toll it might take on the relationship. While there may not be any consequences for credit score, there could be great consequences for your otherwise healthy relationships. If you are delayed or unable to repay a friend’s loan, it will put a massive strain on the friendship - not to mention causing you a tremendous amount of guilt and anxiety.
While encouragement from family is always appreciated when starting a new small business venture - especially from a lending partner - the flip side of this might be interference in your business decisions. In most cases, friends and family may not have the knowledge or expertise in your area of business that you do, but may feel their “investment” gives them a right to a say in business affairs. This can also add a lot of strain on the relationship and on the business, as it is difficult to put professional boundaries in place with a loved one.
Who hasn’t experienced a family scenario in which things have gone unsaid or been misunderstood resulting in conflict? This can also apply to borrowing money. Although it’s great to have flexibility, if the terms are unclear, as in the case of borrowing from friends or family, it can result in serious misunderstandings or conflict down the line.
The bottom line: When it comes to your small business, we know that it’s about using the head and the heart. Your friends and family support your small business in both big and small ways, by supporting and caring for you. But if you don’t want to mix money matters with loved ones, ideally it’s about finding a lender that will still cheer you on, but also give you the trusted business experience your small business needs. Doing what’s best for your small business is in everyone’s best interest – including ours!