How To Borrow Money From Friends & Family
First off, borrowing money (or lending) to family and friends is a terrible idea. Most of us have horror stories of money lent out that cost you the relationship or you let go off to avoid losing the relationship. I have had many such experiences where I lend money out and never get it back. I also have testimonies of decades old money borrowing and lending tradition with my sisters and yes, my mother, and a couple of friends. My entrepreneurial friend Wanjiku also attests to how dependable friends and mothers can be when you need quick bridging credit.
So yes. Borrowing from friends and family does not work most times, but when it does, it is the most dependable way to obtain quick credit as an entrepreneur.
How do you do it? Do you just wake up and text all your friends asking for cash? Nope. I believe there’s process, but also ethics to borrowing from friends and family, and this post gives a few pointers.
Relationship is the collateral
When borrowing from friends and family, your relationship with them is the collateral for the borrowing. As such, you should have taken time to build a strong relationship. It is stupid to borrow money from people you barely know because when things delay or go wrong, there will be no trust to fall back on. The relationship is also both an asset and a liability. When it comes to repaying, you are obliged to prioritize the relationship, compared to say, a bank where you can choose to delay a repayment, because you aren’t friends with your bank.
It only works if it is reciprocal and clear
When people get to know about my “banking” relationship with my mom, they get surprised when I tell them that I lend (and even borrow on behalf) of my mom and she repays and vice versa. For most people, money flows in one direction in their family; from their pockets to the beneficiaries, never the other way. From a very early age, we were taught the difference between “give me”, and “lend me”.
Money that is given is not expected back, but money that is lent out MUST be paid back.
It is acceptable for a family member or friend to have no money to give you, but have money to lend you. No hard feelings there.
Apply the same default rules as you would with a bank
Wanjiku taught me a very useful guide for default when you borrow from family and friends. Assume you have borrowed from the bank. When you miss one repayment, the bank will probably call/email you a reminder to pay. When you miss a second repayment, the bank comes to collect. For family and friends, this is slightly modified:
- When you realise you will miss a repayment, CALL them in advance to let them know you will not be able to repay, and what your plan is.
- When you realise you will miss the repayment promised above, do something radical to get the cash. Sell an asset, liquidate your investments borrow from commercial sources, and REPAY as promised.
Note that the responsibility for communicating delay in repayment rests with you. Do not wait for a friend to call you to ask for their money.
For huge amounts, have a legal agreement and collateral in place
I learned this the hard way, after lending a few friends huge sums of money only for them to fail to repay. It is important to have an agreement and collateral if you are lending large sums of money to friends especially. People change, things go wrong, you want to be able to collect your money at the end of the day. Just to repeat, no hard feelings here, a good friend will understand why you would want to protect yourself.
This weekend’s newsletter will include a template of a legal agreement you can use when lending money, so if you have not subscribed, do so below!
So there you have it. This is how to mix friendship and money. What have I missed? Let’s discuss in the comments section and on Twitter!
