Small Business Q & A: Investing In Son's Business Could Cause A Real Family Feud

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
tim@dropshipwholesale.net
For information on starting your own online or eBay business,
visit http://www.dropshipwholesale.net