Borrowing: A Different Twist on Family Loans
Borrowing from family members is seldom easy. That's especially true in cases where entrepreneurs realize that older relatives can raise cash only by selling long-held securities.
Dave Pennock, chief executive of Specialty Engineering, a St. Paul, Minn., fabricator of precision sheet metal, came up with an innovative solution when he purchased his company for $5 million in 1985. "The former owners accepted a five-year note for $2 million. A local bank gave me another $2 million, using our equipment and buildings as collateral."
Pennock raised $400,000 from personal assets and savings. "But I knew I had to approach family members for the rest," he says. Still, asking for the cash was problematic. "My father was a retiree who lived on social security payments and monthly dividends from some stocks and bonds that he owned."
So Pennock approached his banker about structuring a corporate loan that was collateralized through some of his father's municipal bonds. "That way, he was able to continue to receive his dividends, although there was some risk, because the bank would have seized those bonds if we ever defaulted on the loan." An aunt also put up some stock as collateral, which helped Pennock qualify for a $600,000 corporate loan at prime. On a strong growth track now, the CEO returned his aunt's stock three years ago and recently began returning his father's bonds as well.* * *