Is it okay to get a loan from friends or family for your new franchise business? Let's take a look at the pros and cons of borrowing money from friends or family.
Only a few startup businesses can take off without financing and external funding. Unless you have enough available cash or liquid capital, chances are you'll have to borrow some money to get your startup off the ground.
If you don’t have a sterling credit history, however, securing that funding from a traditional bank or other top-tier lenders may be difficult. That’s why many young entrepreneurs turn to their close friends and family for a business loan.
But, is it really a good idea to get a business startup loan from family or friends? That’s the million dollar question. Consider the following upsides and downsides of getting a business loan from people close to you.
Banks and traditional lenders are not as lenient as your friends or family. They know what you are going through. So, they will give you the time you need to repay the loan when they know the business has picked up.
This kind of borrowing, therefore, provides you with the flexibility that you need to ensure that your business has truly developed roots before you start repaying the loan. Additionally, you can sit down with your friend or family and decide to turn the loan into an investment in your franchise or business.
Loans from friends and family should come with lower interest rates and, ideally, more flexible repayment terms.
The last thing you want is for your business to fail. But, the reality is that nearly half of all businesses started from scratch don’t see their second anniversary. Franchise and business opportunities have a considerably higher success rate. The good news is that a friend or family will most likely understand your situation.
Non-repayment will, at worst, sour your relationship. With a bank loan, however, your collateral will be auctioned off.
Tax Burden and Problems
When you borrow from friends, the odds are that you won’t think about tax liabilities that come with informal loans. If you don’t document the loan properly, you run the risk of being audited by the IRS, so document and account for this type of loan as you would with a formal bank loan.
It Can Damage your Relationship
Borrowing money from family or family comes with a certain level of awkwardness. And if things don't turn out as you planned, your relationship/s may suffer.