It is natural that when we first start out on any business venture, friends and family are the first ones who are asked to support them. I used this method of sourcing for money in my first media startup. However, it wasn’t like knocking on a door and saying, could I please have $5k. I wish life was that simple. Before you embark on taking money from anyone you have to be completely sure about what was talked about yesterday. We need to be completely sure where we are going with our idea, with whom and how. So when I approached an uncle of mine for a loan I prepared a detailed document outlining how the business is going to run. It was a basic executive summary which showed him:
- The market need
- Our value proposition
- The market size
- Our services
- My team
- Payback period
A lot of individuals overlook the fact that taking money from friends and family is risky business. We have a lot invested in our relationship with them and any sort of complication leads to friendships being lost and family ties strained. You have to make it absolutely clear to them from the very beginning what it is that you need the money for. I feel this gives them much needed relief, because from their perspective they will realize that you have put serious thought into the venture and that in itself is a good starting point.
Another factor that you have to take into account is whether they will be buying in to the business in return for equity or the funding will serve as a loan which will be paid back. I have a relatively strong preference for the latter. Involving family and friends is complicated as it is, if they buy into the company this further complicates matters and they may have completely radical ways of viewing your business model. If you take a loan from a friend or family member make sure that they are financially capable of withstanding the loan. If not you could get a call out of the blue one day requesting the loan money be returned straight away due to an emergency. That is another situation which can be the end of an early stage startup.
Whichever route you take be sure to do it professionally, with openness and honesty and get everything in writing. These will help safeguard both your relationships as well as your startup’s future.
p.s Source #0: Using savings that you may have. I have made the assumption that like most younger entrepreneurs you don’t have significant savings to initially fund the startup process. However if you have a some money saved up I would strongly suggest that you use that instead of venturing out to the next source.
If you lend money – get it in writing – create a loan agreement and promissory note.
I’m sure that you heard the old adage never mix business with pleasure. Most people prefer to keep their personal and professional lives separate, particularly where money is involved. Poor business decisions or ventures can lead to a rupturing of a friendship and the same holds true in a money-lending situation. Many good friendships have been lost because money has been lent and then misspent or not repaid. But what about situations when there is no one else to turn to? You’re desperate for money and your best friend offers their assistance. Can you afford to turn him or her down? Or what about the reverse – one of your closet friends comes to you with a financial problem and asks for your assistance because they have no other options? Would you feel right turning them away? How can you avoid falling into the pitfalls of mixing friendship and money as either the lender or the borrower? Here are a few tips on how to approach a loaning situation between friends.
• Eliminate All Other Options Before you accept money from a friend or offer money to a friend, make sure that there aren’t any other options you can pursue. Are there other lending companies that will work for your situation?
• Have you cut back your expenses to the absolute minimum or are there some non-essential items that you can do without?
• The most important thing to keep in mind is that borrowing from friends should be your last option, not your first. If you can get it from someone or somewhere else, then you should.
• Treat it like a business arrangement. Use a company such as One 2 One Lending to document and collect your loan. A third party can prove to be very valuable in removing the emotions from a private loan.
• Most friends don’t mind lending the money and helping someone out, but it can be very aggravating to believe that money is being misspent. If you’ve borrowed money from anyone your first priority is to pay that money back.
And if you are the lender, don’t let your frustration build up – make your feelings heard and let your friend know. Introducing One 2 One Lending can act as your voice and maintain a professional relationship.
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