You are ready to launch a business. However, banks and traditional investors are reluctant to fund your venture. Family and friends may be your best option for securing the needed funding. But you must be careful, thoughtful and have a plan in place before approaching your family and friends for business loans. Money and relationships are at stake. You don’t want to lose either of them.
Issues to consider when soliciting for business loans
You need to set realistic expectations, clear conditions and deadlines for repaying the business loans. When financing your business with friends and family, you should do the following:
- Define business interests: You need to determine if you’re simply borrowing money or if you’re taking on equity partners in the business. If family and friends are simply loaning you money, you won’t have other directors in the business. If you acquire equity partners, your business will have more voices and opinions. This may fit in with your overall plan, but it may not.
- Select the best strategy: Borrowing money is difficult and comes with strings attached. You need to decide whether to seek many small loans from multiple sources or larger loans from fewer investors. Large investors, contributing 5% to 25% of total funding, may require an equity stake in the business.
- Present a business plan: You need to demonstrate that you’re properly prepared to run the business. A comprehensive and complete business plan does that. You need to present the upside profit potential, but you must acknowledge the risks involved.
- Signing contracts: Your investors have worked hard to earn their money. Now they’re entrusting it to you. You need to draw up an agreement with your lenders. No matter the amount of money, you need to put everything into a contract. It should include the interest rate, repayment schedule and all other details.
Relationships at stake
Your new business could be a brilliant success, but it could also fail. You need to weigh the risks and rewards when borrowing from family and friends. Bank funding or venture capital may be better options.
If you lose money from family and friends, the relationships will often change for the worse. Many business owners have spent decades building relationships. You don’t want to tarnish or destroy indispensable relationships. How to fund your business is one of the most important decisions you will make.