Borrowing Money for Business: When Friends and Family are Involved
Many new and aspiring entrepreneurs often turn to borrow funds from friends and family for their business ventures. However, it is essential to understand that just because the individuals are close to you does not negate the need to honor any agreements and to enter into a contract. This is crucial to ensure both parties are legally protected. Failing to uphold your obligations can lead to legal action, and potentially strain your personal relationships.
The Risks and Consequences
Letrsquo;s consider a case where a friend or family memberrsquo;s advice led to the downfall of a small business. A few years ago, I visited a local barber shop in the UAE. My friend was discussing his recent failure. He had worked hard and saved for retirement but was encouraged to start a small supermarket in the community through a business idea. Despite initial reluctance to take a loan, he decided to pursue it. While he managed to get inventory on credit, he faced difficulties paying fixed expenses. When he approached the bank for a loan, the market downturn led to a lack of capital. Soon, vendors stopped offering credit, leading to bounced rent checks and ultimately, the supermarket’s operations shutting down. He lost around AED 200,000 in savings and suffered from high employee turnover.
Financial Abuse and Legal Considerations
Monetizing personal relationships by borrowing money can be seen as financial abuse, which is illegal. If someone is vulnerable, such as elderly or disabled, the situation becomes even more critical. Engaging in a business transaction with a friend or family member can fundamentally change the nature of your relationship. When you are unable to repay the debt, stress and friction can arise, causing significant strain.
Advice for Women Entrepreneurs
As a woman entrepreneur, I can say that most of the time, it is best to avoid raising money from friends and family. Very few businesses, unless they are in tech hubs like Silicon Valley, are capital intensive. Once you take on borrowed funds, you are obligated to spend them. Unless you are part of that 1%, it is advisable to think carefully before involving friends and family in your business financing.
Conclusion
Borrowing money from friends and family for business purposes can be risky and potentially damaging to personal relationships. It is vital to recognize the legal obligations involved and to formalize agreements to protect both parties. If you are considering such a venture, it is strongly recommended to explore more traditional financing options or to seek professional advice before pursuing it.