Here are six things that will make it a little easier for you and your family:
1. Treat it like you would any other loan: In other words, plan on making regular and timely payments—even if they initially suggest you don’t need to (which they probably will). Making regular payments right from the start lets them know you appreciate their help and take their relationship with you seriously. It also sends a clear message that you don’t intend to take them for granted.
2. Ask for what you need, no more: I’m convinced the worst answer to “How much do you need?” is “How much can I get?” This is particularly true when talking to family. Be prepared to explain exactly how much money you need and what you need the money for.
3. Put it in writing: Capture any agreed-upon terms on paper, preferably in a formal document that spells out how much you’re borrowing, what the payment terms are, and any interest (if applicable). This can be a standardized loan document you can download for free from the Internet or can be something you create. An Internet search will reveal several online services that can help you structure an agreement for your particular situation if you’d like to go that route.
4. Keep the agreed-upon terms: Although this might sound obvious, if you commit to making a payment at the first of every month, make the payment. Treat your family member or your friend the same way you would any other creditor. If your dad suggests you defer making payments “until you start making money,” you should define what that is. His definition could be different from yours.
5. Be prepared to take a little advice along with the loan: Don’t be surprised if your dad, or Uncle Fred, wants to give you a little advice—it’s their cash at stake now too, after all.
6. Be open: Make sure you keep the lines of communication open and establish an honest business relationship with your family lender. Don’t be surprised if they wonder why you haven’t made the last loan payment to them if you pull up to the next family party in a new car.
Loans from friends and family are called 3-F loans (friends, family, and fools) for a reason. Many business owners borrow from family or friends with every good intention of making repayment, but those obligations often get set aside for what is perceived as “real” business obligations. My advice is to treat these loans as real obligations too, because they are.
Borrowing from friends and family adds a level of complexity to business financing that doesn’t exist with other loans. If you take a cavalier approach, don’t be surprised if the next family gathering is uncomfortable.