Q: My youngest son wants to borrow $5,000 to start out his own business. My partner is afraid to inform him no. She thinks we should just give him the money and not expect anything in return. I disagree. He doesn’t have a very good background with money, so I’m just a little worried that my investment will be lost. Should I loan him the money and hope for the very best or just tell him no and hope he doesn’t get too upset?
A: The first thing you should do, Jeff, is determine if this money will be offered to your son by means of a gift, loan or investment. The wording of your question informs me you have not yet made that all-important distinction.
It sounds like your wife wants to make a gift of the money, expecting nothing in return but the undying love of her last born son.
You, on the other hand, don’t know if you should offer the money as financing (should I loan him the amount of money) or being an investment (worried that my investment will be lost).
Until you could make that distinction, your money should remain in the bank.
I have a simple rule with regards to loaning money to relatives: NEVER, EVER loan money to anyone you might have to sit next to at Thanksgiving dinner.
“Son, pass me that dressing and tell everybody the story of how you blew your old dad’s retirement money…”
A loan from a relative is not any different than a loan from the bank. You, Mr. Banker, are giving your son, Mr. Borrower, the use of your money for a particular period of time and you also fully expect the loan to be repaid under specific terms, even though his business goes south. Sure, you will likely be a bit more forgiving than a bank when the loan goes unpaid, however the damage to your personal relationship could be extreme and hard to correct.
In the standard of terms in the event that you loan your son the amount of money you feel the creditor and he becomes the debtor. Have you ever heard of a creditor and debtor having a good relationship? Has Visa ever called you up just to ask how you’re doing? Has your mortgage company ever named a kid after you? family feud questions not.
Exactly the same rule applies with purchasing a relative’s business. I have raised money for several businesses and not once did I ever think about asking my relatives to chip in. The final thing I’d ever want to do is lose my mother’s yard sale money. I’d never hear the finish of it!
An investment is made with the understanding that your money is totally at risk without guarantee of return. Even beneath the best of conditions an investment in any business is a gamble. You’re betting your money that the business will be successful and that you will get a payback at some point in the future.
Hug your money real tight prior to making the investment, because if the business enterprise doesn’t make it, you won’t ever see your money again.
You and your wife also seem very worried about making your son mad, which raises another huge red flag for me. If your son isn’t mature enough to take the term “no” without getting upset, he’s definitely not mature enough to start and run a small business. Unless that business is a bicycle paper route, and even i quickly wouldn’t put my money on his likelihood of success.