Wealth of Wisdom

CHAPTER 20Creating a Family Bank

James E. Hughes, Jr.

The family bank is a practice that provides a means for a family's wealth to be leveraged by making loans available to family members on terms not available commercially. These are loans that would be considered high risk by commercial bankers but are low risk to the family because of their contribution to the family's long-term wealth preservation plan.

Loans from a family bank are usually for two purposes: investment, to increase the family's financial capital, or enhancement, to increase the family's qualitative capital, that is, the family's long-term well-being.

Investment

In the case of loans for investment, the family's purpose is to take advantage of opportunities brought by individual family members for financial gain. The loans give the family opportunities to grow its financial wealth while also enhancing the intellectual growth of individual members. These are frequently investments in businesses founded by individual family members.

Such business loans should follow these basic rules:

1. The borrower prepares a business plan and a loan application equivalent to that required by any commercial lender.
2. The borrower discusses the project's feasibility with the family bank's board and advisors.
3. When a loan is granted, the borrower provides proper business reports on the investment.
4. The borrower ultimately repays the loan.

This process gives the family borrower excellent business training and the highest possible ...