Friends and Family: The Overlooked Loan Source

  • By Heather Miller
  • Published 1/19/2015

Key lessons from behavioral economics and microfinance suggest that borrowers are much more successful when they know and have the full support of their lenders. Yet friends and family lending often carries a lackluster reputation when it comes to financing a small business, but only because it occurs without structure and clarity. We are setting out to make friends and family lending easier for both the borrower and the family members who simply want to help. We believe that when you lend and borrow in a community, everyone wins.

The Majority of Businesses Are Funded by Friends and Family

According to The Hartford’s 2014 Small Business Success Study, small business owners are finding commercial loans more attainable, yet a less desirable funding choice. In fact, personal sources of funding now rival traditional commercial loans, a 39% increase from 2012.

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For startups, this holds even more true. According to the Center of Venture Research and Angel Resource Institute:

  • Personal savings and credit fund 57% of startups with an average investment of $48,000.
  • Second to this, friends and family invest the most in startups, funding over $60BB per year, at an average investment of $23,000. This accounts for funding for 38% of startups, and is not all that surprising considering friends and family are some of an entrepreneur’s biggest supporters.
  • Then, after venture capital and angel investors, the SBA funds 1.43% of startups with an average loan size of $143,899.

Because friends and family lending is already taking place and the lack of credit available to deserving entrepreneurs, we created a platform that gives structure to friends and family lending. This structure allows us fund what banks would classify as ‘riskier businesses’ at lower rates compared to other alternative lenders. In an Able loan, friends and family fund 25% of the loan, and we fund the rest. Bringing in outside investors into the loan unlocks matching funds from Able that otherwise the entrepreneur could not obtain otherwise.

Traditional Friends and Family Lending Lacks Clarity

The most popular argument you will hear against friends and family lending you money for your business is the risk associated with possibility of ruining the relationship. Let’s look at how can this happen:

  • Repayment dates were not established upfront, and if there was an interest rate it might have been unclear
  • Often business owners find that they need more money than they originally thought, and asking again can cause friction
  • Perhaps the conversation took place over the dinner table or during a social gathering, and no official loan documents came together
  • All of the sudden your savvy friend now thinks he manages the business, or your mom did not realize she might not get paid back

We took these common pitfalls and created a friends and family loan platform that is financially and legally sound. Three to five outside friends and family, who we call Backers, fund at least 25% of your loan. Each person signs a legally binding loan agreement with you, and a legally binding loan agreement with Able. Repayment terms are clear, and Able services the loan on the borrower’s behalf.

Able is a New Platform for Collaborative Friends and Family Lending

The majority of the small businesses we work with have already taken funding from friends and family, and are hesitant to make the ask again. Here’s how Able is different:

  • Friends and family Backers earn interest payments over the life of the loan.
  • Able collects payments from borrowers each month, and automatically deposits interest payments to Backers throughout the life of the loan. Backers receive their principal back at the end of the loan’s term.
  • Friends and family participation in the loan unlocks three times more capital from Able.

” Nelson M. - Backer to Able customer Branch Basics

Our goal here at Able is to bring the missing structure to friends and family lending, while funding more deserving entrepreneurs. Learn more about growing your business with an Able loan here, or investing in an entrepreneur you believe in here.

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