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Important to know if you are going to borrow money from a family member to start your own business

If you need money to start your business, it's often easier to borrow from a family member.

But is it really a good idea?

There are both advantages and disadvantages and therefore I'll give you a list that could help you decide what to do.

9 pleasant advantages:
1. It's easier than going to the bank.
2. It's a fast way to get money.
3. You don't have to have a business plan.
4. You don't need to keep up with all the paperwork that the bank requires.
5. You don't need collateral.
6. It feels good that the family is behind your decision and supports you.
7. The interest rate may be lower or none at all.
8. Banks are suspicious of companies that have no proven history.
9. A family member may lend money without thinking too much about what he/she gets back - unlike venture capitalists.

4 important drawbacks:
1. Family members may feel that they have the right to make decisions about how your business should be operated.
2. A family member is often a silent partner. That means you probably get different suggestions (even those you don't want to hear) on how to do things.
3. If business fails, you will always be reminded of it - or be worried about being reminded of it.
4. The relationship is at risk or may even be destroyed if you lose all the money.

Advice if you intend to borrow money from a family member:
1. Explain the risks for the lender properly. To lend money to a startup business can mean that the money is lost forever.
2. Accept the loan only if you know that the loan is extra money or is money that the family member can earn back (never borrow your grandmother's hard-earned savings).
3. Make the loan professional by displaying a real business plan so that your family member can make an informed decision.
4. Write a contract that shows how and when the money will be paid back and honor the agreement.
5. Borrow as little as possible.

Now, there's something to think about  ...

About the author

Stefan Ekberg has worked in marketing for small business for 20 years and has written around 30 books on how small business owners can market themselves with limited resources. . In 2012 Stefan was nominated as Entrepreneur of the Year in Stockholm.

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