THE BUSINESS — LAW BRIDGE

This is the second in a series of posts addressing challenges that confront parents when children request business loans.  The first post described five general areas of inquiry that may help parents begin to sort-out the issues (“When the Bank Says “No,” Mom and Dad say…” January 25, 2010).  This post discusses the nature of the parents’ angst.  The next post will offer some suggestions for parents caught in the eye of this “perfect storm.”

A perfect storm rages.

Storm clouds formed when the substantial demand for capital by those seeking to establish and rebuild small businesses converged with the banks’ tight lending criteria.

The wind whipped-up when many of those without access to bank financing turned to their parents for loans, forcing the parents to weigh potentially life-altering factors for and against.

These dilemmas upgraded the disturbance to a “perfect storm.”  A parent in the eye of this storm may encounter some combination of the following:

The Child

►   is on the verge of becoming destitute;

►   is unemployable and has no viable way to earn a living other than business ownership;

►   has nowhere else to turn;

►   has been unsuccessful in prior business and career pursuits or had a viable business or career that was derailed by the recession;

The Parents

►   cannot afford to lose the amount they are being asked to lend or could survive the loss but are unwilling to simply loan the money and hope that the child does not repeat past mistakes;

►   lack the objectivity and tools necessary to evaluate financing requests;

►   fear damaging the parent-child relationship if they don’t extend the loan or require terms that might hurt or anger the child, even if the terms would routinely appear in bank loan documents;

►   feel compelled to “save” a child based on love or regrets about their own role in the child’s life;

►   lack confidence in their child’s business acumen and know that they will not sue even if there is a default on the loan;

►   want their child to be successful for reasons that can include love, concern about being repaid, desire to help the child break behavioral patterns that have led to past business or career failures;

►   believe that to succeed their child will need a support system that includes a business mentor or coach and a CPA experienced in advising owners of small businesses;

►   lack the expertise to mentor or coach their child or have the expertise but could not be an effective advisor because of the history of the parent-child relationship.

►   need an “early warning system” to alert them to performance issues that may jeopardize the business’ ability to repay them;

In the eye of this perfect storm, bankers and parents reverse roles.  Banks, not parents, impose discipline through strict credit criteria leaving parents, though ill-suited to the task, to fill banker’s role.

When the bank says no to a request for small business capital, the next call is frequently to mom and dad.  Many parents are unprepared for the ensuing business, financial and emotional challenges.

The nature of those challenges varies with the circumstances and parent-child relationship.  Here are five general areas of inquiry to help parents sort-out the issues:

• What is your child asking for?  Parents should first determine the seriousness of the child’s financial situation.  Is money for living expenses needed before the business loan can be addressed?  The child should provide a detailed explanation including the amount needed, the intended uses and how and when it will be repaid.
• Can you afford to make the loan?  The child should be told up front if the parents lack the wherewithal to fund the loan or if they can’t fund the amount requested.  Parents should consider how the loan would impact their lifestyle, in the short run, long run and, in the event of illness or death or if it is not repaid.
• Is it prudent to lend your child money for this purpose?  Lacking the skills, experience, resources and objectivity necessary to evaluate the financing request, parents should not make a decision until a business plan has been vetted.  If necessary, it should be explained to the child that pressure, such as “you don’t trust [or have confidence in] me,” or “if I lose this deal it will be your fault” only delay the process.  Parents should also be wary if there is any history of deception, unreliability or dishonesty.
• Is lending the money the best way to help?  If parents conclude that the business plan is faulty or that the child is not well suited for entrepreneurship, extending the loan would only set the child up for failure.  Instead, they should explore other avenues of helping.  Blaming past failures on circumstances or others may signal that the child has not learned from past experiences.
• What criteria will you use to decide?  Chances are that the parents will make their decision based on some combination of business criteria and love for their child.  Also, a parent may want to consider the interests of other stakeholders, such as other children or a spouse if the parent is in a second or later marriage.  The criteria should be established and clearly communicated to the child.