Tags: small business | family | loan | children

4 Questions to Ask Before Funding Your Child's Business

4 Questions to Ask Before Funding Your Child's Business
Anupong Thongchan/Dreamstime

By Thursday, 25 March 2021 06:11 PM Current | Bio | Archive

As the e-commerce industry grows, younger tech-savvy generations are looking to put their skills to work by launching online side hustles and full-time businesses, a trend that has accelerated due to heighted job insecurity during the pandemic. But starting a business, or even pivoting one to focus on online offerings, takes capital. It may be especially hard for young adults with few assets to qualify for many business loans, prompting those who are trying to create online opportunities for themselves to ask family and friends for funding assistance.

4 questions to ask before mixing business and family

Statistics show that nearly one in four businesses are moving online during the pandemic, so there undoubtedly exists opportunity for new and innovative entrepreneurs. However, funding remains an issue, especially for businesses that require upfront capital. What questions should parents ask when their adult children turn to the bank of mom and dad for funding? Here are four ways to approach the question of how to support your child’s business venture.

Is it a loan?

It’s no secret that lending money to family and friends can be risky. You’re not just taking a chance with your finances, but also with your relationship if they default on the loan. If you decide that this financial assistance will be in the form of a loan, it’s a smart idea to clearly delineate the terms of the loan in a formal contract. Be sure you have clarity on the amount of money you will loan, the interest rate you will charge, the length of the loan and how you expect payments to be made. It’s also smart to have a clear understanding, in writing, of what will happen if the loan goes unpaid or if your child falls behind on payments.

It’s not uncommon for business lenders to ask for a copy of the business plan, proof of business registration and any business financials before approving a loan. You might consider asking your child for these documents, too. Requiring these in advance of loaning them money can help ensure your child is serious about doing the work it takes to run a business online.

Keep in mind that in some cases it’s possible to qualify for a startup business loan with a credit score of 530. You might prefer for your child to borrow from a lender, with potential assistance from you as a cosigner if necessary.

Will you help run the business?

You should get clarity on whether your child expects you to act as a bank, or whether they’re interested in potentially working with you to run their business. If you have expertise in a similar field, you could lend valuable insight that could help your child succeed (if they’ll listen to you!).

Depending on the size of your child’s business venture, you might also want to consider professionalizing by recruiting non-family members to form a board. Statistics show family businesses in the United States have an interest in corporate governance. This level of oversight could help lay a foundation you can rely on when there are tough decisions to be made.

Keep in mind, if you’re working in the business, this opens another layer of questions about your financial contribution. Will you own part of the business or are you strictly a lender? Will you be paid by the business?

Document any ownership you have of the company and your involvement. This is particularly important if there ever comes a time when you have to sell the company, or if the company is liable for any reason.

Is this a gift?

If you want to help your child with their business venture, but don’t want to be involved and don’t expect the funds to come back to you at any point, you could consider gifting the money to your child. When doing so, keep in mind the IRS rules around gift tax. In 2021, the annual gift tax exclusion is $15,000.

Gift tax is generally the responsibility of the donor to pay. Any funds you give to another person are considered a gift, although post-secondary tuition and medical expenses are excluded. This is also important to consider if you are lending your child money without interest. If the amount is for more than the annual exclusion, this could look like a gift in the eyes of the federal government.

Are there non-financial ways to support your child?

Over 79% of small businesses in the United States have only one employee — the founder. It’s no secret that starting a business can be grueling, especially if your child is doing all of the work by themselves. If you want to support your child but can’t do so financially, consider other ways you can help. Ask your child if there are any business tasks they feel comfortable delegating to you. Or, alternatively, consider ways to help alleviate pressure for your child elsewhere in their life while they start their business. This could be as simple as helping with home maintenance, chores or even cooking. Sometimes just knowing you support their dreams makes a big difference, even if you aren’t able to do so financially.

Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.

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As the e-commerce industry grows, younger tech-savvy generations are looking to put their skills to work by launching online side hustles and full-time businesses, a trend that has accelerated due to heighted job insecurity during the pandemic. But starting a business, or...
small business, family, loan, children
Thursday, 25 March 2021 06:11 PM
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