Sometimes, a business may need to improve cash flow, for whatever reason. Perhaps times have been slow in recent months, or perhaps capital is needed for a very good reason. When a small business goes through lack of capital, it can be a big obstacle. Lending from the bank is becoming more and more difficult. There are actually a ton more options that can work for a business, but one option that you shouldn’t overlook is borrowing money from family and friends. For some businesses, borrowing money from family and friends can be a suitable option when facing limited capital and credit. Some may consider it a last resort, but that doesn’t mean you shouldn’t consider the idea and what it could potentially mean for you as a business. It isn’t always bad for business, although when handled incorrectly it might be.
Approaching a family or friend the same way you would a formal lender is a good idea, and can help to give them confidence in you and your idea. You really don’t want this investment kindly given to you by a loved one to go south, so make sure you read on to find out what you can do to improve your chances!
Prepare Your Business Case
First of all, you need to prepare a compelling business case to fill them in on why you would like this money and make them feel good about giving it to you. In the case, you should talk about how long you’ll have the money, how their funds will be used, and anything else they may be interested to know. They are no less important than an investor at the bank you would discuss this with, so make sure you present an interesting case, just as you would anywhere else.
Present A Business Plan
Before you’re due to meet with the family member or friend who is considering loaning you money, creating a business plan that shows them how their investment fits in could get them to see things in your favor. Creating a business plan properly isn't one of the most exciting ways to spend your time, but if it helps you to secure funding it’s worth it, right? It can also give you something to look back on in the future to stay motivated and focused on where you want to be/go.
Document Any Business Agreement Made Between Your Friend/Family Member
The terms will vary depending on who you’re striking up a deal with. However, no matter what these terms are, it’s so important that you put them in writing for the both of you. Make sure you include how much they are lending you, the return on the investment they should get, and any other required payment terms that may be relevant to this. Both parties need to understand the terms of the loan as well as the repayment arrangements before signing anything. While it can often be cheaper and easier to get an agreement template from the internet, you may actually want a true legal professional to create one for you to keep you both safe.
The Pros And Cons Of Borrowing From Family/Friends
Before you approach a family member or friend for money, you need to consider a few things first. It’s so important you know that they have the finances necessary to make a worthwhile contribution to your business. They may feel obliged to lend you money even if they cannot afford it, and you really don’t want that.
If the loan is more than $100k, you should speak with a legal professional to help with bookkeeping/tax services. You’ll also need to consider whether this family member or friend will have any financial liabilities in terms of your business management. If you were turned down by the bank or other lenders when trying to get an investment or capital, explain why to them so you’re completely transparent. Make sure you’ve actually exhausted a few of your options before going to your family member or friend, so they know that you’re serious. If you go straight to them for cash, they may think you’re not serious about it and that you might squander the money. Here, you can view the checklist designed to help you learn a little more about your finances. You must make them aware of all of the risks and worst-case scenarios, no matter how counterproductive it may seem! They will be far more likely to trust you and agree when they know you are being totally honest and transparent with them.
Take a look at some pros and cons to help you figure out further whether this is a good idea for you:
Borrowing Money From Those Close To You: The Pros
Enjoy Flexible Terms
Usually, you’ll get flexible terms with your family/friends, unlike borrowing money from traditional sources. They may agree to a longer repayment period for instance, as well as seeking a lower rate of return. However, not expecting this from them could be the key to securing the money you seek. Practically no security will be required, and the repayment could be tailored perfectly to the projections you have come up with for the future.
Virtually No Loan Charges
Perhaps the funds offered from your friends/family will be given to you with little or no interest in mind. If you are startup or a company that is even losing money right how, you may not be able to afford ridiculously high interest fees. Interest rates can be sky high for people in your position, but loaning the money from loved ones can eliminate that.
Pretty Easy To Sort Out
Loaning money from family and friends can be pretty simple to set up. As they already know what you’re about, they may be willing to loan you the money without the need for a detailed business plan. However, you should still consider making one, at least a rough version, to show them that you are serious about this venture.
Borrowing Money From Those Close To You: The Cons
Feuds And Arguments
The biggest downside of choosing to loan money from loved ones, is that it could very well end up in a feud or argument if it isn’t handled correctly. You may lose those closest to you, so you need to consider whether these relationships are worth losing. You may have every intention of paying them back the full amount, but you never quite know what will happen.
Part Owning Your Company?
You need to consider how your family/friends are going to feel about the business once they’ve loaned you money. Do they now feel that they own part of your business, or that they have a say in your decisions? You must make sure you discuss this when you’re propositioning them beforehand so you can hire out all of the kinks and creases. State it in the loan terms so that there’s no confusion. Remember, that even if you do state it they may still feel some kind of entitlement, depending on how much they’ve loaned you and what kind of people they are.
Potentially Less Stability
Family and friends can sometimes want money paid back even faster than a bank would, or even the arranged terms. Perhaps they experience personal financial issues and suddenly want the money back from you. A bank, for example, can offer you more stability in this respect. You won’t have to worry about them panicking over their finances and calling you to repay early, because that just isn't what banks do. However, people are flawed, no matter what you agreed on, so it’s always a possibility you’ll need to bear in mind.
In Conclusion: Is Borrowing Money From Family And Friends Bad For Business?
Borrowing money for your business from someone you love could very well be the best option for you right now. It can be a great way for small businesses to get started when nobody else believes in them, or a way for them to boost their service/offerings when they need cash to do so. Banks will be concerned about lending to businesses with no evidence that they have traded successfully yet.
There are more options out there than your standard bank, of course, so make sure you look into all of your options and consider them too. Peer to peer lending, and even crowdfunding are popular options for businesses these days. You also have options like looking at your unpaid invoices that you may have cash tied up in and considering whether you can sell those to another company to get money fast. There’s no reason to think you’re at the end of the road when you truly have an abundance of options.
Will you be looking to loan money from your family/friends, or are you going to use another method to ensure your relationships aren’t put at risk? Do you have any experiences you’d like to share - is it a bad or a good idea? Leave a comment!
Featured Image from Shutterstock - By Duncan Andison