If your child wants you to invest in his/her new business, “just say no”.

Let me explain why I say this by way of example.

Terry and Nicole were retired & happy.  They had plenty of income from pensions and investments.  Life was good.  No.  Make that ….life was great.

But their son Charles was struggling.  Times were tough.  He was a hard-working young man and a skilled construction worker but found it difficult to move up in life.  He longed to be his own boss but didn’t have the money to go into business- until his grandmother passed away.

Charles inherited $300,000 from his dear granny. He missed his grandmother when she died.  But when he got that check, he thought his dream had come true.  He was in business – finally.

He bought trucks.  He bought tools.  He hired sales people and secretaries.  He rented a large office, furnished and equipped it.  He had a fantastic infrastructure in place.  He open his shop.  It was slow for the first few months but then……..it got even slower.  The phone stopped ringing completely.

Within a year, Charles burned through all the money that granny had left him. Now the story gets really ugly.

Charles explained to his parents that the business would go under…. unless of course they invested. Thinking they could salvage the company (and Charles’ inheritance) they invested in the company.

$400,000 later, Terry & Nicole were broke too. In an effort to save the company and get their $400,000 back, they took out a second mortgage on their home.  (I think they call this “doubling down” in Vegas.)  Charles went through that too. In fact,  Charles continued burning through cash and building up credit card debt.  He even failed to make payroll tax payments and ran up a bill of over $125,000 to the government. Both Terry and Nicole went back to work.

In the end, Granny’s gift of $300,000 ended up costing Terry and Nicole their retirement, their home and peace of mind.  It also cost Charles his condo, inheritance and landed him $175,000 in debt.

Am I saying that your child is as talented at running a business into the ground as Charles?  No.  There are exceptions.

If someone close to you wants to borrow money to go into business, let them borrow it from someone who is impartial.  This is a better way to gauge if the business is sound or not. This will force the person who wants the loan to do their homework.  Giving a loan to someone just because you love them could be like giving someone just enough rope to hang themselves.  At the very least, if you going to ignore my advice, consider an investment in your child’s business as a gift - and don’t expect to get it back.

What has your experience been? Have you ever invested in your kid’s business?  Have you ever taken a loan from your parents? How did it work out?

Like this article? You will love getting my free brilliant financial updates! No spam, and I won't give your email address to any other person or company.That's a personal promise. Neal Frankle, Certified Financial Planner, Los Angeles, California

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