Beware of parents bearing loans
Ken C. Wisnefski describes it as a blessing and a curse.
This entrepreneur, who started business outsourcing firm
VendorSeek in 2002, borrowed $100,000 from his father so he could grow the business.
STOP! Right now, I’m hoping many of you hear the scratch of a runaway needle on a vinyl record.
I’m sure you know how this story goes -- badly.
Why? Because money and family don’t mix. Trust me, I know of what I speak.
Okay, back to the story.“We needed to expand," Wisnefski says. "Things were not growing the way I wanted and we were coming up short on capital.”
He was tapped out, including home equity loans, and the bank wouldn’t pony up additional credit.
So he went to Ken Sr.
His father agreed to give him the funds he needed but there was one stipulation -- his dad would become an employee.
His dad’s funds were a godsend. “The money saved employee jobs and the business from probable failure,” he says, “but it interrupted the dynamic of my relationship with my father.”
Never had the two men engaged in serious verbal battles in their prior relationship as father and son. But with the new dynamic, the battles were taking place on a monthly basis regarding disagreements in how Jr. was running the business. Even many of VendorSeek's 31 employees were starting to feel the tension.
There are no good numbers that show how often children borrow money from their parents to start a business, or help grow a business, says Bruce Phillips, senior economist at the
National Federation of Independent Businesses’ Research Foundation.
“We used to say the main source of financing were the three 'F's: Family, Fools and Friends,” he quips.
I asked him if borrowing cash from parents was a good idea.
“It depends on how much they have. That’s the wise-ass answer,” he says. (I figured that.)
“Sometimes it’s definitely a no, because it can ruin a relationship.”
If it’s done at all, he advises, signing a promissory note after showing it to a lawyer, and establishing a payback schedule, just like a car loan.
You also have to consider unforeseen circumstances. What if you parents get sick, or lose their jobs and need the money ASAP. Talk about family fueds.
And don’t be lulled into complacency if you have everything in writing.
Just being asked constantly about the loan got to
Jason Hanson, real estate investor and author of "How to Build a Real Estate Empire".
“When I first started my residential investment company I borrowed $30,000 from my parents for a pre-construction property. All terms of the loan were put in writing and both parties agreed to the terms," he explains.
But, (
you knew there was a but) "after I received the money my parents constantly asked me questions about how the construction of the property was coming along, when were they going to get their money back, etc. I felt like a five year old child who was getting nagged every 30 seconds to make his bed.”
He ended up paying his parents back as promised but in hindsight, he says, the headache wasn’t worth it.
His advice: Don't do it
Ken Jr., who says his dad has done an excellent job, admits he'd do it all over again despite the hell.
But, he adds, “I probably would have set up a better understanding that ‘hey, it’s still my company.’”
Since his mother died six months ago, both father and son have “reevaluated how we’ve been acting.”
