What might seem like the easiest source of money in a tight situation might be the most difficult.
Family members who borrow or lend money from one another, regardless of which side of that equation they are on, face some potential emotional perils.
It’s one thing to disappoint officers with a bank or savings and loan by not being able to keep up with payments on interest and principle; they’re sort of used to it.
It’s quite another thing, however, for parents or other family members to be left in the lurch.
“In today’s tight credit market, a growing number of adult children are turning to the Bank of Mom and Dad,” according to a recent Forbes.com piece by Frank Jaffe. “Many parents have an impulse to be generous as they watch adult children in their 20s and 30s struggle with an unbending job market and unforgiving economy. Parents are lending their children money to help pay for everything from graduate school to starting a business or buying a home.
“When a friend or family member asks to borrow money, think about why they’re asking you and not someone else,” suggests J.D. Roth in a piece on Entrepreneur.com. “They may see lots of money coming into your business, payroll being met, maybe your nice house and car. What they don’t see is the credit line that keeps your doors open or how thin your profit margins really are
“Still, that hasn’t stopped many business owners from learning the hard way that family, friends and finances don’t always mix.”
In his piece, Roth offers five suggestions for those who decide to extend loans to family members anyway:
1. Discuss other options.
2. Lend only the amount you can afford to lose.
3. Be clear about your expectations.
4. Get it in writing.
5. Deal with problems right away.
A sixth piece of advice, get the advice of an attorney before entering into such an arrangement, might also be wise to include.