Parents Lending Money to Children – Good or Bad Idea?

Lending money to family – especially your kids – is usually a very bad idea for both parties concerned. This is easy to say and hard to execute – I get it.  None-the-less, let’s consider how very destructive this can be by reviewing a real life example.

Terry and Nicole were retired and 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 for him. He was a hard-working
young man and a skilled construction worker, but he 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 salespeople and secretaries. He rented a large office, furnished and equipped it. He had a fantastic infrastructure in place. He opened 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 someone would lend him money. Thinking they could salvage the company (and Charles’ inheritance), they started writing him checks and didn’t stop.

$800,000 later, Terry and Nicole were broke too. In an effort to save the company and get their $800,000 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 were forced to leave retirement and go back to work.

In the end, Granny’s gift of $300,000 ended up costing Terry and Nicole their retirement, their home and their peace of mind. It also cost Charles his condo and 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.  If your kids are forced to go this route, they’ll only get the money if the other party thinks the business is viable.  If your children don’t have a good business plan, the universe will lovingly tell them “try again”.  Maybe their ego will get bruised a bit – but their finances (and yours) stay intact.

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. I know this is easy to write and that it’s tough to turn your kids down – especially when they are in a desperate situation.  But if you lend money to anyone, you have to do it safely. And if you are going to “invest” in your kid’s business, only give them as much as you can afford to lose.  Consider it 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?