1) You don’t have to worry about the loan shark taking the risk.
If you think your friends or/and family might lend you money, even though traditional bankers are saying no, then you probably have a pretty good relationship with them. You believe they care about you, and you probably feel the same way about them. If you don’t realize that there is a chance that you business can fail, then you shouldn’t be going into business. Whether due to external factors, or your own mistakes, any business can fail. Is this a risk that you feel comfortable asking your friends and family to take? Whether they invest in equity or debt, they should understand that there is a chance that the money might be lost. Since you care about your friends, you might not want them to take that risk.
2) If you can’t repay the loan shark you lose your credit, and maybe your house. If you can’t repay your family, you may still risk losing your credit and your house – but, more important to some, you also risk losing your relationship with your family member. When you accept investment/a loan from friends and family, experts agree that you should have it all written down, including collateral. You are not necessarily eliminating the risks of a bank loan. If you don’t want your friends to take as big a risk in their investment, you should certainly try to make it just as risky on your side as it would be with the bank. However, there is also your friendship at stake. Is this something you want to put on the line?
3) The terms of the loan are very clear when you work with the loan shark. Misunderstandings abound when accepting money from family and friends. Whether the unclarity surrounds the framework (equity, gift, loan) or over the terms (repayment method, interest, collateral) there is more than enough space for confusion to deter even the most loyal friends. It also puts your benefactor in the uncomfortable position of having to charge you interest, or requst collateral. This can put a strain on the friendship by itself, because both of you may be wondering if your friend would actually put you out on the street if it came to that.
4) The loan shark won’t ask you why you are going to London this summer, yet you were late with a payment last month. Don’t forget that family and friends know what you are doing and may see you on a regular basis. If you get a nice new watch, or go on an expensive vacation before your business is really booming, it could put a heavy strain on your relationship – and might elicit annoying comments. When working with a loan shark, this is a nonissue.
5) You don’t share mutual friends/family with the loan shark.Perhaps one of the biggest challenges is that loans rarely stay secret. It might come up when you all go out for dinner, or when you are talking to each other in church. But is very unlikely that it will stay between the people involved. It then has the power to taint your entire social life, especially if your business takes a turn for the worse. Think about it: Do you want to risk losing your parents retirement money, getting nagged constantly, and possibly losing your business and your family support network at the same time?
Be smart and think about all the possibilities. If in the end, you still want to go with a family/friend loan, I suggest you use a third party as a go-between to take some of the strain out of your relationship. One such company is Virgin Money. If you decide that you’d rather pay a bit more, and keep your friends and family out of the equation, then there are many different types of companies that offer alternative financing to businesses who are unable to get traditional loans.