Millions of businesses pop up across the U.S. each year. But starting a new business is expensive and beyond the financial means of many. How do innovative entrepreneurs get the money to fund their dreams? Surprisingly, friends and family are the main funding source for 38 percent of new businesses. If you’re worried by the thought of asking someone you know for a loan, these tips can help you take advantage of the most accessible and affordable way to subsidize your small business.
Why You Should Mix Family, Friends, and Money
It’s a common belief that you shouldn’t borrow money from friends and family, but TrustLeaf co-founder and business development manager Daniel Lieser says that’s misleading advice. Many corporations today wouldn’t have existed without help from loved ones. TrustLeaf was specifically created to facilitate business loans from friends and family to entrepreneurs.
Lieser cites cases of famous entrepreneurs who have reached phenomenal success with help from friends and family. Warren Buffett, for example, was able to fund his first small business by borrowing from seven of his friends and relatives. Richard Branson of the Virgin Group got financial support with a loan from his aunt. Sam Walton, the late founder of Wal-mart, received financial help from his father-in-law to open his first store.
You may balk at the idea of asking someone you love for cash because you’re afraid of imposing or putting them in an awkward situation. However, Lieser says, “It is harder for the borrower to ask for money than it is for the lender to say yes. Your friends and family will lend you money, and it’s not that big of a deal.”
Before You Ask
Be prepared to answer your potential lender’s questions and share a visual representation of your idea whether it’s via slides, graphs, or schematics that demonstrate your plans and seriousness about getting started.
Lieser says you should know the following before you ask:
- How much you’re asking for
- Why you’re asking for it
- How you’re planning on spending the money
- How and when you will pay it back
- Any consequences for late payment
You’ll also want to make sure you’re prudent about the amount of money you’re asking for. Lieser says you shouldn’t put your lender in a spot that would compromise their own financial well-being.
How to Ask for Money
Afraid of how your friends and family will react? Take heart. Lieser says, “For at least 90 percent of our users, the lenders are well aware that the borrower will be asking for money.” In fact, he says they’re probably already anticipating the question especially if you told them about your idea.
So how do you do it? “It’s pretty simple, actually. Ask them to coffee or lunch, and let them know you’ll be pitching your idea. Also make it clear that they don’t need to give you an answer the same day,” Lieser adds.
Protect Your Relationship
Perhaps the greatest concern of entering into a borrower-lender relationship with a loved one is the fear of ruining your relationship. Lieser says you can avoid that by discussing the potential risks, not overpromising, and being “clear and honest” about your expectations upfront and in a written agreement. This, he says, can prevent “relationship-damaging issues associated with non-repayment. A signed, written agreement with all the terms in black and white may not be the most fun document you’ve ever created, but it will save you dozens of headaches in the future.”
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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.