Leave Your Family Out of Your Business

Sometimes when negotiating a loan, the lender tries to either stretch to make the deal work by enlarging the playing field.   Or more sinister, they see an opportunity to reduce their risks by testing the idea of more personal guarantees on the loan than may be necessary.   The personal guarantee of a wealthy, albeit uninvolved family member, is not easily ignored by many lenders.

Just say no.  

Mixing business and family is a difficult proposition when all parties are voluntarily involved.   Letting the lender reduce you to begging a family member to borrow the money for you is the wrong way to start a relationship.   If your deal won’t be approved with only you, the business owner, endorsing it, just don’t borrow the money.

When a family member endorses, guarantees, or “co-signs” your loan, the problems are plentiful.   First, it allows the lender to appoint a new director to your firm.   Potentially, the relative will start watching your business with much more interest if they suddenly have a financial stake in it.   You have but one more critic to satisfy.   It is not the lender’s job to appoint your management.

Secondly, even if the guarantee was offered, rather than requested, you still have no way of ensuring the business gets the best deal.   Some companies have failed due to meddling “investors” who do not have the business experience or ability to contribute.   Landing in a deal just because their net worth seems to be a good idea of securing the loan is too risky.

Third, family dynamics enter your operations and organization chart.   Suppose the guarantor your father.   What if your training, experience, and industry instincts are leading you to implement a particular strategy.   However, your father doesn’t like it, based on some depression-era reasoning or experience he had in an entirely different industry, position, and market.

You manage your father’s polite objections handily until he starts assuming the role of your parent.   Using names from your childhood (like “son” or “sweetheart”) the debate shifts to the same tone of why you weren’t allowed to go to the junior sock-hop.   You have to face up to an entirely inappropriate, unfair, and emotional pressure.

Avoid these situations by just staying away from your family’s wealth, and make your business stand on its own.   It may take longer, cost more, and be much smaller.   However, it’s yours alone to succeed, fail, or land somewhere in the middle.  

Other family risks more common will be a lender’s appetite to get your spouse to guarantee the loan, though the spouse has no ownership or involvement with the business.   The lender has no reason to demand such a term.

An exception is only when you are using a jointly owned asset to secure the loan, and the spouse has to sign on to perfect the collateral.   However, even then you should demand that the spouse’s guaranty by “limited” to their ownership in that asset.

Involvement of your spouse carries the same penalties as mentioned above, except worse.   You live with your spouse, and usually see them daily.   They are harder to avoid, and may use the guaranty as standing to ask questions about business.   It can ruin marriages.

If you were contemplating divorce (or someday decide to), the business loan guaranty can be something to make your business and lender a party to negotiations that may already be complicated.

It is best to leave all members of your family who do not own part of the business out of any involvement with the business financing.   Find another way to secure the lender, and be firm about standing alone behind the deal.

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