Benefits and Downfalls of Family Business Loans

Establishing and administering your own company can be your dream, and also it can serve as a great way of securing finances for your future.

Most of you who think about starting your own business will have to face the question of how to obtain capital for the business at some point or the other, and most of you would probably be seeking outside sources for this purpose.

For some of you, the outside source may be your family members or friends.

Seeking business loans from one of your friends or family members becomes very important, especially when you are about to start your very first business venture and do not own an established cash flow and a proven success record.

In such cases, most conventional bad credit installment loans lending institutions like banks, credit unions, and private financial institutions might hesitate to offer you a loan, and hence obtaining a business loan from a friend or family member will start to make sense.

Even if this is the case, most experts suggest that it is better to keep the help from a family member or friend as a last option, after you have explored all other possibilities of obtaining a loan.

Some other options you might want to consider include opting for peer-to-peer lending or having a cosigner or guarantor to sign for your loan. If nothing works out as you planned, then you can go for family loans.

Taking out a business loan form a friend or family member has both benefits and downfalls.


Lower interest rates: One of the major benefits of borrowing money for your business from your friend or family member is that you will be offered a loan with a lower interest rate than that you would obtain from any traditional lending institution.

As mentioned before, most lenders hesitate to offer loans to startup businesses, and even if they do, the loan will carry a much higher interest rate in order to compensate with their risk. This can be avoided by obtaining a family loan and you can save money from the interest to run your business.

Flexible terms: By obtaining a loan from a family member or friend, you will be able to negotiate more flexible repayment schedules for the business loan you obtain from them, which is unlikely to happen with traditional lenders. This gives you enough time you require to stabilize your business.


Complicating relationships: Obtaining loan from a loved one is usually a delectable proposition. If it turns out to be inappropriate, then your personal relationship with that person can get immensely damaged. In order to prevent this, you should treat the proposition strictly as a business transaction and discuss all potential dangers well ahead.

Interference: Another potential downfall of obtaining a business loan from a loved one is that you may start receiving voluntary business advice from that individual, as he or she might start thinking that they are a part of your business after having lent the money.

You should constantly remind the person that the loan was not bought by providing them any rights over your business.