My youngest son wants to borrow $5,000 to start his own business. My wife is afraid to tell 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 track record with money, so I’m a little worried that my investment will be lost. Should I loan him the money and hope for the best or just tell him no and hope he doesn’t get too upset? -- Jeff K.
The first thing you need to do, Jeff, is determine if this money would be offered to your son in
the form of a gift, loan or investment. The very wording of your question tells me that 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 a loan (should I loan him
the money) or as an investment (worried that my investment will be lost).
Until you can make that distinction, your money should remain in the bank.
I have a very simple rule when it comes to loaning money to relatives, Jeff: 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 no different than a loan from a bank. You, Mr. Banker, are giving
your son, Mr. Borrower, the use of your money for a specific period of time and you fully expect
the loan to be paid back under specific terms, even if his business goes south.
Sure, you will probably be a little more forgiving than a bank when the loan goes unpaid, but
the damage to your personal relationship could be extreme and hard to repair.
In the most basic of terms if you loan your son the money you become the creditor and he
becomes the debtor. Have you ever heard of a creditor and debtor having a very 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? Probably not.
The same rule applies with investing in a relative’s business. I have raised money for several
business ventures and not once did I ever think about asking my relatives to chip in. The last
thing I’d ever want to do is lose my mother’s yard sale money. I’d never hear the end of it!
An investment is made with the understanding that your money is totally at risk with no
guarantee of return. Even under the best of conditions an investment in any business is a
gamble. You are 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 before making the investment, Jeff, because if the business
doesn’t make it, you will never 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 word “no” without getting upset,
he’s certainly not mature enough to start and run a business.
Unless that business is a bicycle paper route, and even then I wouldn’t put my money on his
chances of success.
The bottom line is this: if you can afford to give your son the money and can do so without
attaching strings to it, then by all means give him the money and wish him well.
Encourage his entrepreneurial spirit and support him as a parent should.
Do not, however, expect anything in return and never bring up the money again, especially if
he’s the one carving the turkey on Thanksgiving Day.
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