Great Ideas for your Small Business: Borrow Funds from Your Family
Like most good parents, gene and sandee Nabat did everything they could to give their three kids a comfortable upbringing. They lived in West Bloomfield, a suburb of Detroit, and sent the children to good schools. But the Nabats never planned to invest $500,000 in their only son’s invention, a small black plastic gizmo called the Findit™.
As a teenager Craig Nabat washed, waxed, and detailed cars and sold T-shirts to earn extra cash. In college he sold pepper spray to sorority girls. Reading Napoleon Hill’s classic book Think and Grow Rich (Fawcett Books reissue edition; 1990) prompted Nabat to dream up something he could sell to the masses via infomercials. He wasn’t sure what “it” was until he came home late one night and couldn’t find his TV remote control. That’s when the brainstorm hit. He’d invent something to help people find lost items. Designed to help absent-minded folks locate small things like remote control units and car keys, the Findit emits a high-pitched beep when you clap your hands three times.
With his own family’s money on the line, Nabat works seven days a week and has put his romance on hold to devote all his time to his invention. When dozens of electronic engineers refused to meet with him, he flew out to Northern California and finally got an appointment.
When his parents balked at contributing any more capital, he hired a consultant to draft a formal business and financial plan, which indicated the Findit could actually make money—if it was a hit. “He keeps saying to me, ‘Dad, we’re going to be rich!’” said Gene. “He’s convinced he’ll sell millions.”
Gene and Sandee Nabat admit the past six years have been very tough. Gene, an accountant by training, manages the money for a property management firm. He’s planning to retire soon and hopes to have his money back. What was initially going to be the $35,000 they’d set aside for Craig to attend graduate school, somehow ballooned into half a million dollars. Craig’s sister, Jacqueline, also invested money she hopes to see again. So far, no family member has been repaid.
How to borrow money from your family
- Establish the amount of the loan and terms of repayment in writing and sign a promissory note.
- Treat the family loan as professionally as you would a bank loan. Make payments in full and on time.
- Keep your family informed with regular written reports outlining what’s going on at the business, but don’t dis- cuss business matters at family social events.
- If things are going badly and you can’t make a payment, tell your family immediately. Try to get an extension on the term of the loan.
- If you don’t think you will be able to repay the funds borrowed, let your family know right away. They may be able to write off the money they gave you as a business loss.
- Don’t borrow money from any family member who can’t afford to lose it.