USING OTHER PEOPLE’S MONEY
Published: Newsday May 14, 2001

RICHARD JOSEPH
GENERAL MANAGER,
CARIBBEAN BUSINESS SERVICES LIMITED

Many small businesses complain that they are unable to get funds required for investment, and when they get funding, the cost in terms of interest and charges is too high. Taken to the logical conclusion, it can be inferred that there is a belief of a right of easy access to cheap funds, and that this right should not be subject to restriction.

The reality of the situation is that if you do not have sufficient funds of your own to invest, you will have to use Other People's Money (OPM). Invariably, OPM whether provided by friend, family or institution, comes with strings. The first and most frequent is that it must be paid back. The second is normally that rent (interest) must be paid for using it. In the case of family and friend providers, even if the first two strings are more flexible there may be the intangible or emotional strings.

Understanding where the money that is being provided has come from enables the borrower to understand the kinds of strings and conditions that it comes with.

OPM provided by banks is itself OPM the bank has obtained from depositors and shareholders. In most cases, banks work with more demanding strings and conditions from depositors than they request from their borrowers. Most depositors expect full and immediate repayment of their deposits whenever they want it, without notice and regardless of the relationship with the bank. Depositors are also not tolerant of any errors in the recording of transactions or calculation of interest.

Friends and family provide OPM from their savings, and depending on what the savings are for, and if and when they plan to use it, the strings attached will be stronger or weaker. Getting OPM from them normally involves the same procedures as banks even though it may not appear so. The person who is lending the money would have made an in depth assessment of the borrower during their relationship on which they would base the amount of trust they are prepared to give. When borrowing relationships with friends and family go bad there can be much more confusion generated than with a banking relationship, and this confusion may not be restricted to the courts.

How can the small entrepreneur get open OPM to finance a business venture? Is it worth to even try?

The first person the small entrepreneur has to convince that OPM will be repaid is himself. This has to be based on a commonsense understanding of who will buy what is being offered, how much they will pay for it and whether it will be sold quickly enough to repay the OPM and provide an income for the entrepreneur. If he can honestly convince himself that he can repay, he will have a good chance of convincing a potential lender.

It must be understood that there is no obligation for a lender to agree that the business venture is a good opportunity that would not involve loss. The justification that is made does not have to be long and complicated. It should be simple, clear, and based on facts as much as possible. The only persons who are able to get OPM easily for a risky business either have money of their own, or have a good track record of success in risky ventures.

Once the money is received, the conditions under which it has been given must be scrupulously followed whatever the source, otherwise problems will soon arise. If problems are expected they should be communicated to the lender early along with the plans to deal with them.

All of the above is just as relevant to borrowing money from friends and family as from banks. There in no obligation that people who have money not being used, must lend it to people who need it. Very few people lend money without knowing if and when it will be repaid, and borrowers should always be able to put themselves honestly in the shoes of the lenders if they wish to be able to make the transactions work.