Lending Money to Family Members

UMassby Stephen J. Simurda
adapted from Family Business magazine

Even Shakespeare warned against it. “Neither a borrower nor lender be. For loan oft loses both itself and friend,” he wrote in Hamlet. Somehow, though, I bet the bard never wanted to start a small business or go back to graduate school only to find himself a little short of cash.

Still, the point he makes has become something of a conventional wisdom these days. Many people feel that it can only lead to trouble to loan money to those close to you. At the same time, family members loan each other money all the time, for reasons ranging from the serious (starting a new business or buying a first home) to the spurious (paying off the $300 you just lost betting on football game). What are these lenders risking, besides just money, when making these loans?

“The danger is that it creates opportunities for family conflict and disappointment, and family businesses usually do all they can to avoid any kind of conflict,” says John Ward, professor of private enterprise at Loyola University Chicago who often works with family businesses. Ward says that too often loans to family members become “tests of personal responsibility,” rather than simple financial transactions. Terms and expectations are left unclear, leaving both sides vulnerable to feelings of unfairness or betrayal. And, in many cases, loans are never repaid in full, leaving bad feelings on both sides. More…