What would you do in these three situations?
- Your mom asks for your help with a down payment on a new home.
- Your friend has a business idea that he wants you to invest in.
- Your sister-in-law got caught embezzling money and needs money for bail and to repay her debtors.
These were situations we ran into when interviewing different founders across the US. The embezzling sister-in-law situation was one of the crazier “ask for money” situations.
Is there a definitive right answer? I don't think so. There is so much nuance in each situation. However, you should look at each request for money as an opportunity to make family gatherings and interactions awkward. Don't make Thanksgiving awkward!
Unfortunately, it's not always a clear answer, and often, you are screwed if you do and screwed if you don't... For your sanity, I hope you never encounter posting bail for your sister-in-law, but here's a useful framework you can use when a family member or friend asks for money.
- Are you comfortable losing the money?
- If you decide to give it, write it off completely as if you will never get the money back.
In reality, a loan to a friend or family member is a gift and you should emotionally account it as gone. If they do pay it back, consider yourself lucky.
Here is how the situations were handled by the way:
- Down Payment Dilemma: The couple decided not to provide the down payment. They were concerned that their mother was seeking a larger home than she could reasonably afford, which would likely lead to continued financial support from them in the near future.
- Investment Opportunity: Investing in a friend’s business is a common scenario, but one notable case led to extraordinary success. The investment resulted in a sizeable exit. I'd say 9.9 times out of 10 investing in friends doesn't return any financial yield.
- Family Pressure: After being guilt-tripped, the couple chose to cover their sister-in-law’s bail and debts. Not suprisingly, it ended up being nuclear bomb. It completley fragmented the family making any type of family gathering intolerable.
Most people just figure it out on their own through trial and error, which can lead to painful experiences. A lot of emotional questions come into play: What if they don’t pay you back? Will it get awkward? Will you still be friends? The likelihood of a personal loan going wrong is pretty high. According to one study, "Among those who have lent money . . . with the expectation of being paid back, the survey found that 59 percent had something bad happen. Forty-two percent of the lenders were not repaid, so they lost money, and 26 percent experienced a damaged relationship with the borrower."
Shannon, a successful entrepreneur, shared her situation, which is likely not too different from yours:
“Most of the money I've loaned to people has never come back to me. So, now I’ve officially quit lending money. Friendships have gotten painful. We’ve suffered so much stress from the time and energy trying to collect it, and then just to lose it—well, it’s more than annoying. It’s emotionally hard.”
The negative impact this dynamic can have on a life is huge. Here are a few unique strategies we found others implemented to navigate giving money to family and friends.
Example #1
Anonymous Giving
Issac was conflicted. He genuinely enjoys supporting family and friends. He loves sharing what he has and helping people who have fallen on hard times. However, he also hates being expected to pay for any situation that goes wrong.
He had an upfront conversation with family and friends about not giving money. His work around to still share his wealth is by anonymously giving.
His sister has a daughter with severe health challenges who is constantly in a hospital. Working with the hospital, he has set up an anonymous “grant” to pay for his niece's medical care without his family expecting anything from him.
He has found other ways to anonymously give money to other friends and family who need it. The anonymity allows him to have the best of both worlds.
Example #2
Draw a Line in the Sand
Owen had a brother-in-law who was a good guy but had a lot of minor money troubles that seemed to stack up—he lost a job, needed a month’s rent, and needed some money for a side project going. Each time he asked for help, Owen obliged. It went on and on, just small amounts, always with an excuse attached, “‘Til I get a paycheck,” and so on.
Like boiling a frog, the requests grew. He went from asking for rent money to asking for a couple of million dollars to buy a business he could build and flip. The business plan was lazy and was clearly not going to work.
At that point, Owen’s wife, fed up with the “guilting,” wrote a text to the whole family: “Can we please just be family? We’re sick of being The Bank.”
Owen sat down with his brother-in-law to talk about his business plan. Owen described the conversation as “we sat him down, told him how much we loved him, and how told him that we think he’s capable, but this business idea was terrible. After we talked through the business idea, I proposed we give him an interest-free loan of a sliver of what he was asking for and told him that this was the last money he would ever get.
The brother-in-law was offended at first, but with time and becoming more independent he came to appreciate what Owen and his wife had done for him.
His self-esteem has changed. He’s happy and no longer trying to ride the coattails of his family.
Example #3
Give More, Once
Tom took an interesting approach when lending to friends and family. Tom’s brother came to him asking for $50,000 “to get on his feet with his business.”
Instead of death by a thousand cuts, Tom agreed to give him the money and event gave him an additional 20% more than he originally asked for.
With that investment, Tom told his brother, “This is it; this is all that I’m going to give you, so don’t ask again.”
Optically, Tom was both generous and firm. Because he was very clear at the beginning, his brother never asked him for money again and felt supported.
Once again, I’ll say it–there are no right answers. Generally, being direct is the best and people will never turn down free money. Hopefully, these stories help spark some ideas on how you can keep Thanksgiving dinner fun.
Want to know our process to loan or not to loan?
