Financing a small business is hard (and getting harder), and most people don’t have much capital to work with. Once you reach a certain point, your business’s operations will demand financing to help keep it growing (and smooth out cash flows).
Small businesses are experiencing a credit crunch from institutional lenders, and so a growing number are turning to friends, family, and fans to raise money. Friends and family loans are a great source of low-cost capital on generous terms, but they’re also fraught with problems.
Here are eight tips if you’re thinking of involving friends and family.
1. Brainstorm Your Options
Don’t put the entire load on one person. If you’re asking for a significant amount, diversify. To do that, you’ll need a list.
Here are some good places to start brainstorming:
- People who have inspired your ambitions
- People who you admire
- People who have supported you in the past
- Current investors
- Other business owners you know and trust
2. Use Email to Set a Meeting
When borrowing money, it never hurts to be overly formal. Try and draft a structured email which explains your business and your vision. Make it clear and include numbers. That way, they’ll know what you’re asking for and can give you a simple yes (or no).
But stop there: email is for setting up meetings, not conducting negotiations. So if possible, arrange a face-to-face to actually ask for money—though a phone call can do in a pinch.
3. Be Specific
Explain to them why you’re asking them for money. Did they inspire you? Do you admire them? Have they been a big supporter? Tell them so!
Let them know that they’re more than just a pair of deep pockets. And whatever you do, don’t just spam your friends blindly.
4. Get Your Finances in Order
Before you go asking for money, make sure you have a firm understanding of your finances. Be able to explain your business. Be prepared for simple questions about your revenue, margins, etc. Make sure your books are up to date and that your balance sheet balances. Little mistakes can kill your credibility.
5. Create Business-Like Documents
To show that you are serious, furnish the people you are borrowing from with official, well-organized loan documents. It is very reassuring to the lender that you are taking your friends and family loan seriously. It shows them you plan to repay them in full. Your friends and family may be more patient… but don’t take advantage.
6. Keep Track of Repayment and Manage Expectations
Things can happen unexpectedly so it’s important to let you lenders know when things get delayed. Be formal, authentic and attentive. Let them know when to expect repayment with a plausible reason for the delay.
7. Be Confident
Believe it or not, the biggest impediment to getting a friends and family loan is not asking.
We’re dealt with a lot of borrowers who were amazed by the outpouring of support — and money — when they asked their friends and family for a loan. Don’t feel bad about taking a loan — lots of businesses have to at some point.
Getting a loan from friends and family is easier than you might think. Often your friends and family are your biggest supporters and cheerleaders. They’re willing to give you money… but you don’t realize it because you’ve never asked.
Remember: you’re not Tiny Tim shaking a tin can asking for money. You’ve got a successful business, and you’re looking for a loan (one that pays interest)—not a handout. Approach your conversations with this mindset.
And, of course, remember that you can always amplify your friends & family money with Able.