Help From Family Has Its Costs
Since borrowing $8,000 from his older brother and $2,000 from a friend to start a jewelry business, Andres Arango says both relationships have soured.
Whenever they communicate, the brother and friend raise the subject of the loan and the progress of his business with a negative tone.
"The well has been poisoned," says Mr. Arango, who launched Muichic, a retail and wholesale business, from his home in Burlington, Vt., in 2009 after getting laid off from a technology company.
While the 34-year-old entrepreneur has assured his investors several times that he's working hard to pay them back, "there's always this underlying tension," Mr. Arango says.
If you're starting a business on a shoestring budget, you may be inclined to approach the people closest to you for financial assistance. After all, those individuals are generally going to be willing to open their wallets whenever possible.
But there can be pitfalls to accepting a financial gift or loan from a relative or friend. The generosity could create tension if, say, your loved one doesn't agree with how you are running the business. Or, the arrangement might add to the stress you're already feeling from trying to build a successful enterprise.
"Don't ask family or friends for help just because they're willing and available," says Alana Muller, president of Fastrac, a program for helping entrepreneurs start and grow companies that's offered through the Kaufman Foundation, a nonprofit in Kansas City, Mo. "You want to make sure your business thrives as a result of their engagement. These are the same people [you're] going to be sitting across from at the dinner table."
Andrea Van Ness says she began stressing out over her personal spending habits after borrowing $10,000 from her parents in 2008 to launch Thumbuddy to Love, a business she runs out of her Boulder, Colo., home that sells children's books she writes and self-publishes.
"If I had any kind of indulgence, like if I went out to dinner with a friend or got a manicure, I felt guilty," she says.
A single mom, Ms. Van Ness became an entrepreneur after a prior career in real estate nose-dived due to the housing crisis. The 47-year-old says she has paid back about half of the loan so far and doing so has helped to relieve her anxiety.
"When you borrow from family, it forces you to work harder," she says. "I didn't want to be a failure in my parents' eyes."
After his last employer went out of business, Paul Kaibni of Potomac, Md., bought a Home Helpers franchise with a $60,000 loan from his father. But in exchange for the financial leg up, Mr. Kaibni, 31, had to agree to give his dad the final say on what the home-care business invests in.
"It's frustrating to not have full control over what decisions your company can go with," he says.
For example, Mr. Kaibni recently wanted to spend $800 on promotional magnets to pass out at events that cater to his target market -- seniors, disabled individuals and others in need of assistance with everyday tasks such as housekeeping and personal grooming. His father, however, opted to buy $200 worth of pens with the company's name, website and phone number on them instead.
Mr. Kaibni says that on the plus side, his dad will always at least consider his ideas and they've grown closer by working together. "Even though we butt heads at times, I know his decisions are for the best of the company and not to make my life difficult," Mr. Kaibni says.
One way to avoid friction or stress when accepting loans from family and friends is to commit to providing periodic status reports on how the business is shaping up, says Ms. Muller.
She also recommends setting terms in writing, including how much control the lender will have and when and how the loan will be paid back. "You want to establish expectations," she says.
Another option is to seek financial aid from family or friends that doesn't involve an actual investment in your business. For instance, Gia Ricci lives and runs a start-up business out of her parents' home in New York for free.
"I can put what would be my rent money toward my business," says the 25-year-old.
To be sure, the arrangement isn't ideal. Ms. Ricci says her mother sometimes barges into her room when she's on sales calls with unsolicited advice about her love life. She also is expected to deal with maintenance workers and others who stop by the apartment when her parents aren't home.
"It can be very distracting," says Ms. Ricci, who began selling artwork on behalf of painters and sculptors earlier this year after an internship didn't produce a job.
Still, she adds that putting up with the occasional interruption is worthwhile given the money she's saving. Ms. Ricci often food shops and cooks her parents' dinner to show she's thankful for their support. "The pros balance the cons," she says.