When many business owners get declined for a loan by their bank, often the next place they turn is a family member or friend for a loan. The family member may have offered the money to you because they can see the potential your business has.
On the surface it seems like a great idea; they are either charging no interest or interest at bank rates, you don’t need to provide any information to them and they can transfer the money quickly. Plus they might have said you don’t need to pay the money back until you are ready.
Before you take the money think of these points:
Better to default with the bank
If for some reason your business fails and you can’t afford to pay back your family member, in some cases you are going to prefer that you owed the money to a Financier. If you default with a Financier you will have a default put on your credit file and need to enter into an arrangement to eventually pay back the money. However, when you can’t afford to payback a family member or friend you may be putting your personal relationships at risk. Running a business has its risks but is it really worth putting your personal relationships on the line too?
Never mix business with pleasure
Lots of people like to have their business and personal lives closely linked. But there is a down side of having your family members knowing financial aspects of your business. Apart from not being able to ‘escape’ work, your family member may start gossiping with other family members. Before you know it all of your family and friends will know more about your business than they should.
Build up a credit history
One of the major factors which determines if a financier is going to approve a business loan is the businesses history with other financiers. Most financiers have an agreement in place to share repayment history of clients with other financiers.
If you take a loan with a family member and you pay the loan back on time you will not get any credit for this when you go to a financier for your next loan.
If you have been declined by your bank and are considering taking a loan from a family member or friend, consider first touching base with Proxy Finance. We have different credit criteria from a bank meaning sourcing an approval is much more likely.