By Tim Knox |
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Q: 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?
A: 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:
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, 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.
Here's to your success!
Tim Knox |
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