A FITTING WAY to describe the concept of being careful would be to characterize it as “being attentive, guarded and/or cautious of one’s actions in certain situations.” This description could basically summarize the overall concept of working with family or friends in starting a small business. It takes on an even more significant tone when thoughts of borrowing money from them are being considered as an option to traditional financing methods.

Asking family for money can be a sensitive issue for most people in general. But when the money being requested is for non-emergency circumstances, such as a business start-up, it can open up those relationships to new issues. A range of outcomes that could lead to a feel-good moment of a family member being there for another in a time of need to feelings of animosity and controversy could easily come to pass if the situation is not handled with caution and concern for everyone involved. So, before approaching family (or friends) for financial assistance, weigh the possible outcomes by considering these pros and cons:
The Advantages of Turning to Family
A lending source with compassion: A family member or a friend may better understand your situation over and above the numbers and information on the business plan. They may have actually been watching from a distance as you put the plan for your small business together too. Unlike a traditional lending source, family and friends can speak to your character issues, work ethic and commitment to success; which rarely shows up on a loan application.

Loan terms = savings: Family and friends might be willing to extend the term(s) of the loan for various reasons. This could assist in reducing monthly payments, the payment amounts, and other fees that a bank might assess. Initial fees (application, credit reports, down payments, etc.) could also be waived; further cutting the costs involved. Comprehensive documentation is almost certainly minimized as well. All of this adds up to savings and frees up your cash flow during start up. 
Interest rates and other factors: A family member may offer a lower interest rate than a traditional lender, representing long-term savings for you. Additionally, they may not require as much collateral (or any, for that matter) as a stipulation for lending you the money for your new business. A bank is almost certain to require this.
A loan or an investment choice: Instead of borrowing from your friends or family, give them the option of being an investor, if it works with your business model. This gives the lending source an alternative to just handing over the money. This option also gives a form of ownership security versus just interest on the money lent to the risk taker.   Plus, it is possible that your lending source may have knowledge, skill or an extensive background in your new business. This experience could also aid as a helping hand in launching your business to its full potential that much quicker.
The Potential Downside to Family Involvement
Family and friends turn into supervisory personnel: Wouldn’t it be great to borrow a huge sum of money from someone very close to you and then have them never bring up the subject again? The only way this may happen is if everything goes exactly according to your plan. So, it’s only natural to assume there will be constant reporting and follow-up on both sides of the equation in order to keep the lines of communication clear and flowing. This can be a good thing until something doesn’t go as planned…and that will be almost guaranteed to happen.   Then when things awry or the loan arrangements look like they might take a beating, a family member or even a good friend might not be as understanding as they were during the initial talks of the loan. All of this may lead them to get the urge to commence unsolicited meddling (or feel like they have a right to decision-making) in your daily affairs; which could lead to other issues beyond just the loan component.
The value of friendship and relationships can be tested: Just like the aforementioned reasons above, any and all of these factors can put a strain on your relationships here. Your family might wholeheartedly support your business endeavor (personally and financially); however, they might not truly understand the inner workings, risks or outside factors that the new business has to deal with each day. And if any of these elements take a turn for the worse, whether they’re your fault or not, they may hold you completely responsible for the collapse of the business. The same goes for your possible inability to pay off the loan they give you as well.   
Stress: There will always be stress in life; and owning your own business will add another layer of stress-related elements to your life. The last thing you need is the addition of family strife. If your business takes a loan with a traditional lender, that lending source takes a big risk as well. And even though they may ask for you to collateralize the loan, there is still risk involved and potential lost revenue for the bank. On the other hand, when that loan is taken from family, it can add up to all kinds of problems (and stress) for them long-term. Lost savings, foreclosure or even bankruptcy could be in store for your family members or friends if they were counting on you for on-time and consistent payments to them. One would always hope their loan to you would be based strictly on risk capital; however, their situation could drastically change from other factors outside of their loan to you. All this adds up to possible disaster for everybody if things don’t go as planned. Stress goes hand-in-hand with the other possible negatives to doing business with family.
Things to Remember
When a decision has been made to reach out to family as a probable lending source for your new business, it is vital to remember to accomplish several things before approaching them. Then apply all of them relentlessly in order to maintain balance and harmony at all times:
  • Be professional and be prepared just like you would for a bank application
  • Communicate effectively, honestly and openly with all parties involved
  • Present all necessary documentation to strengthen your presentation to them
  • Put everything in writing…everything
  • Present options for lending or investing, if applicable
  • Discuss benefits and expected outcomes of the project
  • Discuss potential pitfalls and risks involved with entering into the agreement
  • Keep business matters from comingling with family affairs
  • Lay out a comprehensive communication and reporting schedule for them
Other than utilizing your own funds for a start-up, statistics show that borrowing from family and friends is the top choice for getting small businesses off the ground. During tough economic times and when banks are tightening up their lending criteria, this option will continue to be at the forefront of powering new businesses into the local marketplaces. It can be a rewarding experience for everyone involved if done properly and with all the necessary preparation. It can also, however, turn into disaster if that same preparation and research is ignored.
The advice here is simple; think about it and discuss it with others first. Then, investigate the potential pros and cons from every angle to ensure your decision is based in research and facts, not emotion. Once the decision has been made, use the checklist provided as a partial road map for approaching your family members or friends with the utmost confidence and supporting evidence to back your request.