My cousin is starting his own business, and he’s asked me to contribute some of my own personal savings to his idea. I’ve heard his pitch, and read through his business plan. I like his idea, and I certainly support him. But I’m wondering why he isn’t just getting a loan through a bank. To avoid potential personal conflict, shouldn’t startups seek funding through banks or investors?
It’s great to hear that you support your cousin’s venture. It’s also great that you’ve taken the time to learn about his idea and read through his business plan.
It’s understandable that you’d be hesitant to contribute any of your personal savings to his business. After all, you’d be taking a huge risk with your money. Even if money isn’t an issue, there’s always the concern that if your cousin’s idea fails, it could cause a rift between the two of you.
But here’s the issue: it’s really difficult to secure new business loans.
For the same reasons you’re cautious about your savings, banks are cautious about lending to new businesses. There’s a tremendous risk that the business idea could fail.
Yes, there are loan options out there. The SBA does have a startup loan program. However, they still require that a business be in operation for at least six months, and owners are required to contribute 20%-30% alongside the bank.
Outside of personal savings and money from friends and family, startups generally get their capital from personal loans and/or credit cards. Perhaps your cousin has exhausted these options, or maybe he just wants to avoid the risks that come with these forms of funding.
If not, he can explore these options more carefully. They’re both risky, but risk is the name of the game when you’re in business. And unfortunately, it takes money to make money.
Whether or not you contribute to his business is a personal decision. There is no right or wrong answer here. It’s perfectly acceptable to decline to offer any funding. But if you really do believe in his vision and think he has a real shot at success, it may be worth making an investment in his business, provided you’re using money that you can give away.
I would advise against taking out a loan or giving up personal savings that you can’t afford to lose. In this case, it may be better to help out in other ways.
If you’d rather not take the risk, perhaps you may know some people who would be interested in making an investment. You could point your cousin in their direction, or discuss the business with them to see if they’d be serious about investing.
There are many ways to help your cousin with his business, and they don’t necessarily have to involve you giving him your life savings. Along with helping him secure financing through other means, you can also offer to help in any other way, even if it’s running errands or playing the “gofer.”
Offering your support and time can be just as valuable as making a monetary contribution. Your cousin will appreciate your effort.