Advice from A-Z: Should I Borrow Money From My Father in Law?

by by Azriela Jaffe

© 2000 Azriela Jaffe

USA Today recently reported that the average amount borrowed by the founders of the USA's 500 fastest-growing private companies is $86,748. Whether you count yourself among the fastest growing, or you are a smaller outfit, most small business are initially capitalized by savings accounts, credit cards, and family loans. I wonder if there's any correlation between this fact, and the rising divorce rate. . .

Family loans can cause great tension in a family, especially when the numbers you filled in on the first business plan turn out to be a tad optimistic. It's wise to take certain precautions before borrowing money from a family member, or you might end up in a devastating situation like this:

"My wife and I were married for five years. Against my better judgment I borrowed $25,000 from her dad to help me open up a restaurant. I was concerned at the time about taking his money. What if it didn't work out? What would that do to our marriage? But my wife thought I walked on water, and hey - I was a newlywed, I wasn't going to tell her she was wrong.

"Her dad wanted only the best for his precious princess, and she convinced him that what she wanted more than anything was for me to succeed as a business man. She begged him for the money, and finally, he caved in under pressure.

"Pressure - talk about pressure! Now, I had a new wife and a father in law I was indebted to. I tried to make it work, but it was a nightmare. I worked 100 hours a week, but he restaurant barely broke even.

"My wife and I grew apart. I was always working, and she hated me for not making her and her dad rich. She looked at me like I had betrayed her. Her dad barely spoke to me at family gatherings.

"I told her it was a bad idea to borrow her dad's money! Now, she and I are splitting up, and I am filing for bankruptcy. I don't think that she or her dad will ever forgive me. I don't know how I'll forgive myself. I'll never get into a business deal with family again."

It doesn't have to turn out this bad - even if the business is not successful. But the point is, it can. You can lose everything - the marriage, family relationships, the business, and the most devastating, your self-respect. So, here are some cautions when you are considering borrowing money from a family member:

  1. This is not the time to bring out the bells and whistles and a business plan that is mostly fabricated to impress your prospective customers. If you aren't willing to be completely straight and up front about the risks, don't do it. If family members are going to invest in you, make sure that they are going into it with their eyes open and their expectations realistic. The pressure on you to make your business work will be doubled if you have communicated pie-in- the-sky goals in order to secure family financing.
  2. Don't borrow money from a family member unless they have plenty of it to invest, and if they lose it all with you, they will hardly notice it. The last thing you want to do is wipe out Grandma's pension account, or destroy your parents' retirement plans. You may have dreams of making your family members rich, and they might invest in your plans because they hope that you will do so. Great! But if your plans don't work out, whatever investment you got from them shouldn't be enough to break them.
  3. Don't ignore your gut instinct, no matter how much you need the money. If your intuition tells you, like above, that this is a very bad idea, find another way or don't do it. Your intuition is rarely wrong. Your mind, in a desperate attempt to secure the financing you need, will try to seduce you into the fantasy that all will work out fine. If you are hesitating because you understand that the consequences of failure could be dire, it may be an alarm system designed to keep you from making a big mistake. Pay attention.
  4. Get all of your agreements in writing, and communicate regularly with your investors. If things aren't going well, you don't want to surprise them with the news three years after they gave you the money. Since money is such a touchy subject, they might not demand the information from you - so you have to be responsible enough to give it to them - the good news and the bad news. If possible, secure financing in stages, after you've proven that you have a workable and profitable idea.
  5. Spread the risk. Whenever possible, try not to have all of your capital coming from one family member. It gives that person too much power, risks too much of their money, and it's hazardous for you if the relationship with that person goes south and you are dependent on them. For example, what if you borrow from your father in law, and your marriage busts up?
  6. Determine at the beginning how silent your family members wish to be. They might want to have a say in how you run your business, especially if it starts getting into trouble. You may not feel they have the skills or knowledge to be helpful in that regard. Lay out these understandings before tensions develop. If the investor starts demanding more input than you believe was agreed to, express your concerns and negotiate a new understanding.
  7. Don't kid yourself into thinking that it is possible to borrow from family, and then keep family and business relationships entirely separate. You are inextricably entwined once they write you a check. Make sure you can live with that. When it works, you have the joy of providing a better quality of life for your extended family, and they have the satisfaction of helping you achieve your dreams.

But you always must think about what happens if it doesn't work.

Azriela Jaffe is the author of several books including Honey, I Want to Start my Own Business, A Planning Guide for Couples (Harper Business 1996), and Let's Go Into Business Together, Eight Secrets for Successful Business Partnering (Avon Books 1998) and Starting from No, Ten Strategies to Overcome Your Fear of Rejection and Succeed in Business (Dearborn, April 1999). Also, check out her newly released, The Complete Idiot's Guide to Beating Debt. Check out her books at

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