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.
Posted by ankarlen1215 
