Borrow Money from People You Know For Your Business
Asking for money for your business from people you know is very different from putting in a loan application at the bank. The good news is that you already have a personal relationship built on trust, so chances are they won’t run a credit check on you or ask you to put up your home as collateral. People you know may even give you a good deal with a low interest rate and generous repayment terms. The bad news is that the whole process – from asking to repaying – can be emotionally charged. Here are some tips on how to navigate these waters.
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Steps
- Look for those in your circle who themselves are entrepreneurs. Seek an older, wealthy individual who has been or still is an entrepreneur. Studies show that these folks are most likely to make informal loans and investments in the businesses of people they know.
- Be prepared. Have a business plan ready, and know how much you need. Even Grandma Mabel deserves a good description of how you plan to use the money and when you will repay her. Decide in advance of the request: how much you need, what interest rate you’ll pay, and what kind of repayment plan and security you can offer.
- Suggest a range, instead of a fixed amount. When you finally start talking about money, your supporters like to feel that they are deciding the amount. If you don’t feel comfortable using a range, suggest up to three options where the amount, interest rate and loan term vary.
- When you reach verbal agreement, shake on it and promise to send a draft agreement in the mail. Although your discussions up to this point can be informal, at this point its time to formalize the deal.
- Treat the agreement the way you would if it were from a stranger, and everyone will feel more confident. If it’s a gift, you only need a letter from the giver. If it’s a loan, you need to sign a promissory note which includes the loan terms to which both parties previously agreed.
- Offer to have the loan formalized and managed by a professional. An attorney, a financial adviser, an accountant or a private loan servicing company can do this for you. Your lender will feel more confident knowing that the agreement is a business one with a legally binding contract.
Tips
- If you can afford it, make it clear that you will definitely pay back within a certain time.
- Use email to introduce your business idea. Email is a great way to cast a wide net, gently and informally. Describe your concept and invite anyone interested to contact you for your business plan. Follow up with those folks by discussing your need for capital.
- Offer a competitive return. If a prospective lender is on the fence, offer an interest rate that is better than what the person could earn in a similar term financial investment. For example, the current return on a 5-yr CD is 4.5%; offer 7-10% to really grab their attention.
- Keep the request informal. Be yourself, describe your business, describe your fundraising effort and gauge their interest. But don’t confuse informal with unprepared. Show the person that you’re prepared with a business plan, and have ready the financing options you’re asking they consider.
Warnings
- Pay close attention to the personal relationship and what you know about the individual. Don’t raise money from people who can’t afford to lose it, such as those on a limited, fixed income, especially if you know they’ll have a hard time saying no to you. Also, think carefully before you ask if you really want to have this person as a supporter. Trust your gut and don’t take money from someone who will be a thorn in your side.
