Borrowing from friends and family: Pros and cons

Almost every new business requires some sort of outside funding to get off the ground. If you’ve ever launched a business, then you know how difficult it can be to secure that funding. Young business owners, in particular, may struggle to get business loans without a sufficient credit history. As a result, many entrepreneurs turn to their family and friends for help.

While borrowing from people you know allows you to launch faster with fewer hurdles, the process is not without significant risks. By doing your research and taking positive steps to be ready to make a funding request, you can make an informed decision regarding both your business and your future relationships with loved ones.

• The pros of personal loans
• The relationship risks of personal loans
• Financial and legal complications
• When repayment becomes difficult
• Alternatives to consider
• If you must borrow from family or friends
• Prioritizing relationships over revenue

The pros of personal loans

Here are some of the advantages of turning to friends or family members for a business loan:

Flexible options

For entrepreneurs, especially those with limited or imperfect credit, securing a traditional business loan can be difficult. Borrowing from friends or family often comes with fewer approval hurdles, since these lenders already know and trust you and may be willing to help when banks are not.

Another advantage is flexibility. Repayment terms can often be tailored to your business’s cash flow, such as adding a grace period during the early stages. In some cases, lenders may also allow temporary payment adjustments if your business runs into challenges—an option rarely offered by traditional lenders.

Lower interest rates

Because startups and small businesses are considered higher risk, banks often charge higher interest rates on their loans. These higher rates can increase borrowing costs and limit early cash flow.

Loans from friends or family typically come with lower interest rates, which can reduce overall debt and leave more capital available to reinvest in your business. This can support growth and help you repay the loan more quickly.

Lender benefits

Friends and family members can also benefit from private lending arrangements. When they understand the risks involved, lenders may earn returns comparable to other investments while supporting a business they believe in.

In addition to potential financial gains, many lenders value the opportunity to help a loved one and be involved in the early stages of a growing business.

The relationship risks of personal loans

Borrowing money from family members or friends often appears to be the path of least resistance when you need capital. There’s usually no credit check, interest rates are often lower or nonexistent, and the approval process is as simple as having a heartfelt conversation over dinner. However, what appears convenient on the surface can quickly become complicated, potentially damaging your most valued relationships and creating financial headaches for everyone involved.

Strain on personal bonds

Money has a unique way of changing relationship dynamics. When you borrow from someone close to you, the financial transaction introduces a power imbalance that likely didn't exist before. The lender may feel entitled to comment on your spending habits or life choices, while you might feel judged or monitored. This shift can create tension even in the strongest relationships.

Imagine buying a new car or taking a vacation while you still owe money to your parents. Even if you are making your agreed-upon payments, they might view that spending as irresponsible, given your debt to them. Family gatherings and friendly meetups can become uncomfortable when there's an outstanding debt between parties. The unspoken awareness of money owed can hang over every interaction, making both parties feel awkward or resentful.

Expectations and assumptions

One of the biggest problems with informal loans is the lack of clear expectations. Unlike institutional lenders who provide detailed business loan agreements, family and friends often operate on assumptions that may differ significantly.

Common areas of confusion include:

• Repayment timeline: You might think "soon" means six months, while your lender expects repayment in six weeks.
• Interest: Is this loan interest-free, or does your family member expect something in return?
• Priority: Should this debt take precedence over your other financial obligations?
• Consequences: What happens if you can't pay on time?

These unspoken assumptions create fertile ground for misunderstandings and hurt feelings. Without a clear agreement, both sides are left guessing, which rarely ends well.

The guilt factor

Owing money to someone you care about carries an emotional weight that bank debt doesn't. You aren't just managing a balance sheet; you are managing a relationship.

You might experience:

• Persistent guilt every time you see the lender.
• Anxiety about their financial situation and whether they need the money back.
• Pressure to repay before you're financially ready.
• Shame if your financial situation doesn't improve as quickly as expected.

This psychological burden can affect your mental health and decision-making abilities, adding stress to the already demanding job of running a business.

Financial and legal complications

Borrowing from friends or family carries emotional risk, and it can also create serious financial and legal blind spots. Without formal structures in place, these loans can trigger documentation disputes, unexpected tax consequences, and long-term credit complications that catch borrowers off guard.

Lack of formal documentation

Most personal loans between family and friends are sealed with a handshake rather than a signed contract. While this signals trust, this informal approach creates several problems.

Documentation issues often include:

• No written record of the loan amount.
• Unclear repayment terms.
• No specified interest rate.
• Absence of late payment penalties.
• Missing collateral agreements.

Without proper documentation, disputes become "he said, she said" situations that are impossible to resolve objectively. If the lender unexpectedly passes away or needs the money back urgently, the lack of a paper trail can lead to legal and personal chaos.

Tax implications

Many people don't realize that personal loans may have tax consequences. The IRS has specific rules about loans between family members, and ignoring them can lead to unexpected bills.

The IRS categorizes loans based on the amount and interest charged:

• Under $10,000: Generally, there are no tax implications if the money is not used for income-producing assets.
• $10,000 - $100,000: These loans may require imputed interest calculations. This means the IRS assumes interest was paid (even if it wasn't) and expects taxes on that amount.
• Over $100,000: These are subject to Applicable Federal Rate (AFR) requirements, making strict adherence to market interest rates necessary.

If the IRS determines that a loan is actually a gift, it could trigger gift tax obligations for the lender. Conversely, if interest should have been charged but wasn't, the lender might owe taxes on "imputed interest" they never actually received. It is vital to consult a tax professional to ensure you aren't accidentally creating a tax liability.

Impact on your credit profile

Personal loans from family and friends typically aren't reported to credit bureaus, which creates a hidden problem: this debt doesn't appear on your credit report. While this might seem advantageous because it keeps your debt-to-income ratio looking low, it can backfire.

The downsides include:

• Future lenders can't see your full debt picture.
• You don't build credit history through repayment.
• Your debt-to-income ratio appears better than it actually is.
• You might qualify for additional credit you can't truly afford.

This lack of transparency can lead to overextension and financial trouble down the road. If you eventually apply for a business loan, lenders want to see that you can manage debt responsibly—something an off-the-books loan doesn't demonstrate.

When repayment becomes difficult

Even the best intentions can unravel when repayment doesn’t go as planned. Without the structure and safeguards of a traditional lender, missed payments can quickly spiral into avoidance, conflict, and consequences that strain relationships beyond repair.

The avoidance trap

When you're struggling to repay a personal loan, the natural response is often avoidance. It’s easier to ghost a text than to admit you're able to pay it back.

You might find yourself:

• Stop answering calls or texts from the lender.
• Skipping family events to avoid confrontation.
• Making excuses rather than communicating honestly.
• Prioritizing other debts because they feel less personal.

This avoidance behavior damages relationships far more than honest communication about financial difficulties would. Trust is eroded not by the lack of money, but by the lack of transparency.

No structured resolution process

Banks have established procedures for handling missed payments, including payment plans, forbearance, and structured repayment options. Personal loans have none of these safeguards. When problems arise, there's no neutral third party to mediate or structure a solution, leaving both parties to navigate an emotionally charged situation without guidance.

Legal action complications

If a dispute escalates to the point where legal action seems necessary, both parties face a lose-lose situation. Taking a family member to court also carries the risk of severely damaging the relationship.

The complications include:

• The lender must choose between financial recovery and relationship preservation.
• Legal fees may exceed the loan amount.
• Court proceedings become public record.
• Family and mutual friends are forced to take sides.
• Even if the lender wins, collecting the judgment may be impossible.

Alternatives to consider

Before risking your relationships, it is wise to explore other avenues. There are often more options available than new entrepreneurs realize.

Traditional lending options

Banks and online lenders offer structure and protection that informal loans cannot match.

Business loans from QuickBooks Capital, banks, or credit unions:

• Clear terms and documentation: You know exactly what you owe and when.
• Fixed repayment schedules: Helps with cash flow planning.
• No relationship risk: Your Thanksgiving dinner won't be ruined by a missed payment.
• Builds credit history: Essential for future business financing.

Credit cards:

• Immediate access to funds: Good for short-term needs.
• Rewards programs: Earn cash back or points on business expenses.
• Purchase protections: Added security on what you buy.
• Clear billing statements: Simplifies expense tracking.

Home equity loans or lines of credit:

• Lower interest rates: Secured by your home, so rates are often lower.
• Tax-deductible interest: In some cases, interest may be deductible (consult a tax pro).
• Larger borrowing amounts: Suitable for significant startup costs.

Peer-to-peer lending platforms

These platforms offer a middle ground between institutional and personal lending, connecting borrowers directly with individual investors.

Benefits include:

• Formal loan agreements
• Competitive interest rates
• Credit reporting to help build your score
• Structured repayment terms

Financial assistance programs

Depending on your situation, you might qualify for programs designed to help small businesses succeed.

Look into:

• Government assistance programs
• Nonprofit credit counseling
• Emergency assistance funds
• Employer hardship loans
• Community development financial institutions

If you must borrow from family or friends

Sometimes borrowing from someone close to you is truly the best or only option. If you proceed, treating it with the seriousness of a bank transaction can save your relationship.

Create a written agreement

Never rely on a verbal promise. Draft a formal loan agreement that protects both of you.

Your agreement should include:

• Exact loan amount: Leave no room for ambiguity.
• Interest rate: State it clearly, even if it's 0%, to avoid tax issues.
• Repayment schedule: Specific dates and amounts.
• Late payment consequences: What happens if you miss a date?
• Signatures: Both parties must sign.
• Witness or notarization: Adds a layer of legal validity.

Treat it like a business transaction

Professionalism is your best defense against awkwardness.

• Make payments on time, every time: Automate them if possible.
• Communicate immediately: If a problem arises, tell them before the payment is due.
• Keep records: Document every payment made.
• Consider automatic transfers: Ensure consistency and reduce the chance of forgetting.
• Provide updates: Regular updates on your financial progress show respect for their investment.

Set boundaries

Establish clear boundaries before the money changes hands to prevent overstepping.

Agree on:

• Whether the lender can ask about your finances.
• How you'll handle family gatherings during repayment.
• What information you're willing to share about your spending.
• How you'll address questions from other family members.

Consider involving a third party

Sometimes, a neutral voice is necessary to keep things professional.

Some families benefit from using:

• A family lawyer: To draft the agreement correctly.
• An accountant: To handle tax implications and reporting.
• A neutral family member: To witness the agreement.
• A payment service: To process transactions formally and track the balance.

Prioritizing relationships over revenue

While loans from friends and family can work in some situations, they require exceptional communication, clear boundaries, and formal documentation to succeed. Before accepting money from someone you care about, carefully consider whether preserving the relationship is worth the financial convenience. In most cases, the true cost of a personal loan extends far beyond the dollar amount borrowed.

The most important question isn't whether you *can* get the loan, but whether your relationship can survive it. Often, the answer suggests that exploring other financing options—even less convenient ones, like those available from QuickBooks Capital—is the wiser choice for everyone involved. Your business might succeed or fail, but your family is forever. Make sure your funding choice reflects that priority.

Disclaimer:

*QuickBooks Term Loan and QuickBooks Line of Credit loans are issued by WebBank.