One of the ways to secure funding for your business is by borrowing from friends and family. It is understandable why people would resort to such a method as it is not as stringent as compared to a bank loan or a loan from other legal institutions. In some cases, there are little to no interest rates involved when one repays back to their friends and family, besides friends and family would be more willing to lend to you. It is no wonder that borrowing funds from friends and family are quite common even in Singapore.
In Singapore, data of people borrowing from friends and family are scarce. Nonetheless, a study done by payment system company Payleven in the United Kingdom in 2014 found that more than half of the survey participants had lent friends and family an average of £272 (S$503) a year, and a quarter had argued with or lost a friend because of it. Therefore, it is safe to say that some Singaporeans do lend money to their friends and family and a number of them do not get their money back. Even if they do, it is not in full. A survey done by Paypal’s Money Habits in 2015 also shows that more than one-third of adults in the United States had loaned an average of US$450 (S$609) to friends or family, and nearly 50 percent were not paid back.
In this article, we will look at the possible outcomes of borrowing from your friends and family as well as to compare that to legal funding.
The outcomes of loans from friends and family
Borrowing from someone we know leaves the red tapes and stringent paperwork at the door. Bank loans or loans from other financial institution requires preparation of complicated documentation as well as a good credit standing. Besides this, waiting time for loan approval is a factor while applying for a bank loan. By borrowing from family members and friends, there is no paperwork, waiting approval and collateral or guarantor involved, just pure trust.
The downside of this is that debtors can take advantage of that trust. There is no “probability” in telling how likely someone would pay back the loan as there is no foundation to that, unlike a bank loan whereby they access you based on your credit score.
There is no proper rule written down that borrowing from friends and family requires repayment with interest. Hence, most people would choose to repay the loan amount to their family and friends without interest. If the debtor is the kind of person who wants to go the extra mile, then they would include the repayment with interest.
However, because there is no repayment schedule or period involved, debtors take advantage of this fact to delay the repayment period as long as possible, to the point of not returning at all.
Relationships might go south
There are many cases whereby relationships among families are affected by people not repaying after borrowing. Some even go to the extent of not ever repaying the amount borrowed and kept borrowing time and time again. A lot of them will give empty promises to repay the previous amount, and then add on asking for more loan amount. A lot of family members fall prey to sly tactics like these, and it becomes a never-ending cycle. Most of the family members do not have the heart to say no to the debtor, most possibly due to the relationship or the ingrained belief that families are supposed to help each other, no matter what.
A lot of these debtors are thick-skinned enough even to face their family members or friends who have loaned them money and pretend that the loan never happened, tactfully sweeping the underlying matter under the rug during family and friend gatherings. Relationships between the debtors and the lenders are usually awkward, and issues involving money are not confronted. Many times, due to the inability of the debtor to pay the loan amount, most family members have a bad impression of them, hence leaving a scar in the relationship.
Relationships can be destroyed
Some cases involving the debtor not repaying their family members to the point of repeatedly borrowing from several family members would cause the relationship to turn sour. It is common where family members argue over money matters, what more then if it’s from their own flesh and blood, taking advantage of family relations and repeatedly borrow loan amounts that will never be repaid.
Things will then escalate to bad family relationships, whereby family members will want nothing to do with the debtor or they just go ahead and assume that the debtor is ‘dead to them’.
The same goes for friendships. The likelihood of destroying friendships is higher as compared to family relationships when debtors never repay the loan amount or in full as compared to family members.
Guidelines when borrowing from friends and family
All in all, there are times when one is in desperate need of cash, and with nowhere else to turn to, borrowing from friends and family seems like the most viable option. Here are some guidelines to keep in mind when you do land in such situation.
Only turn to your family members and friends after you have tried all possible loan options (except Ah Longs, of course, you wouldn’t want to endanger the lives of you and your loved ones). Keep this as a last resort kind-of deal as it may save you from a lifetime (possibly) of “family favours” and perhaps the inability to pay back which will lead to ruin family relationships.
- Have a term agreement
Official or not, draw up a written agreement stating the loan amount and also set a repayment term period with your family members or friends. A black-and-white agreement holds as much power in court and will be more likely to keep debtors on-time with their repayment habits and schedule.
- Include interest and pay back early
Yes, despite the fact that this is not necessary nor obligatory, debtors can impress or keep in their family members or friends’ good books by doing so. By maintaining timely repayments, and including interest, debtors can maintain a good relationship with their family members, and also be more reputable and trustable in their eyes.
To avoid all the fuss borrowing from friends and family would bring, you can…
Choose Legal Funding Loans / Non-bank Lender – FS Bolt
FS Bolt is a mobile application that enables business owners and SMEs to get an SME loan of up to SGD 50k within 24 hours and with 2 hours approval time. There are no “complicated human relationships” involved nor is there “favours” being owed as when borrowing from family and friends, and borrowers are protected by legal means using the guarantor system. The application is made straightforward, simple and easy for all. The app also tracks the borrower’s loan amount and repayment schedules.
At the end of it all, if you are comfortable borrowing from your family and friends, by all means, go ahead. However, do keep in mind on how you would want to “maintain” the relationship by making sure timely repayment and not taking advantage of the linearity of the loan situation. Or else, give FS Bolt a go, we are not as stringent as a bank loan, but we also keep it in line with the borrowing necessity provided by a financial institute to fulfil the needs of Singapore’s SMEs.
Funding Societies – Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)