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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