My column this week at the Tennessean examines taking business loans and investments from family:
Family members provide funding for many different reasons. Some are motivated by altruism — they just want to help the entrepreneur get started and be successful. Others can be driven by greed — they see the investment as a way to ride on the entrepreneur’s coattails to fortune and fame.
But no matter what the reason they provide financial assistance, defined boundaries and clear expectations should be clearly established.
One of my good friends started his first business with a loan from his wealthy uncle. Evidently, my friend was one of the only relatives who actually ever paid a loan like that back! It’s hard to believe that people would behave that way with their own family members. But my friend will always be able to borrow money again from this uncle, should he ever need to.
I got started in real estate on the side when my grandparents sold me (and financed) two rent houses. They were pleased that I showed some interest, and I was thrilled that they sold them to me at a fair price and interest rate. I’ll always be thankful that they did that for me.
(And yes, I most certainly made all of my payments, and on time. Our family attorney drew up the sale and loan agreement, so it was official and specific. I wouldn’t do a significant loan with a family member any other way.)
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You are right, too many people enter into a business loan with family members thinking a hand shake will do. These loans need to be treated as if they are obtained from any other lending institution.
With interest rates as low as they are these days providing a loan to a family member can be a great investment, provided you can stand the risk.