Borrowing from Friends and Family to Finance Your Startup Business

Borrowing from Friends and Family to Finance Your Startup Business

Part one of our "Guide to Financing Your Startup"

An important source of capital for many small and home-based entrepreneurs is family and friends. However, borrowing from kin is not without risks—simply because of the strain it may put on relationships. Keeping the relationship professional is the key to successful borrowing from close acquaintances. Here are some tips for formalizing the transaction to ensure that friends, family and financing make a good mix.

Ask Like a Pro:

Be professional when asking family or friends for a loan. Have a clear business plan that shows you have done your research and that you will have the necessary cash flow to keep up your payments. Treat family and friends like any potential investors – it’s up to you to convince them, not the other way round.

Set the Ground Rules

When getting a business loan from a family member or friend, it’s vital to set the ground rules. The most important thing to remember is to resist the temptation for verbal agreements: Set the terms of the loan by putting everything in writing. Having both parties sign a loan agreement significantly reduces the potential for a misunderstanding. Assure them that you realize this is not a gift, but a loan. Set a clear plan for repayments. Offer alternatives for when you can pay the money back.

Some close family members or friends may initially feel uncomfortable at the prospect of signing a loan agreement, but you should explain to them that the agreement is not a sign of distrust on your part. Instead, it is an indication of how seriously you take your financial responsibility to them.

What to Give in Return

When it comes to funding, it is critical to give some thought to what you are willing to exchange in return for a little capital. While professional investors will not part with their cash unless they are promised something in return, some family and friends will be happy to just give you money as a loan. If this is acceptable to you, then do it. However, you may want to offer more than just a loan, such as equity in your company or a percentage of future sales. Doing this can save you from having to make payments in your difficult first year when there are always cash flow issues.

Look Beyond Your Immediate Circle

Getting financing through friends and family isn’t your only option. Extend your circle to include friends of friends, family contacts or even people from work, school or your neighborhood. Don’t rule out the possibility of approaching a community leader or a successful local businessman—the local connection may be enough to start a fruitful relationship.

Other Ways Friends and Family Can Help You Start Your Business

You don’t have to receive money from family and friends in order for them to help you get your business off the ground. Besides money, there are many other ways they can support you in your venture.

Manpower In the early days of a startup, there usually many things that need to be done, and very few people to do them. Family members can help out if they are serious about supporting you. Not only can this benefit your business, but it can strengthen your relationship, too. Remember that you are the boss – only give family members tasks you are comfortable they can handle. On the other hand, don’t come down on them too hard simply because they are family. From the simple tasks of setting up the office, to the standard filing and admin work, there are always jobs that can be done by unskilled workers in any startup.

Expertise If you have access to someone with direct experience in your industry, their experience can be valuable. It may not be someone in your immediate family; it could be a friend of your mother’s, or your uncle’s business partner. Use them as a sounding board, ask for their advice, or even make them a board member.

Assets Using assets owned by family and friends for legitimate business purposes is a viable alternative to cash. Whether they have a large space that can be used as your initial office or a spare car that you can use for transporting supplies—using family assets might be just the thing to help you get your startup off the ground.

Support Starting a business can be a stressful and lonely experience. As the sole owner of a business, the pressure is all on you, regardless of who else is involved. Family and friends can be there for you when the pressure is on, and can help you relax, giving you more drive and energy then next day.

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