Like most of us, you are probably reluctant to ask friends and relatives for money. But, at one stage or another, a lot of people do when they are running their own businesses. If you are really serious about starting and/or staying in business, swallow your pride and go beg for those funds.
If your friends and family express an interest in assisting you with your business financing, then pitch them professionally.
How Should I Pitch a Relative or a Friend for a Business Loan?
Don’t be embarrassed to show financial statements, tax returns, or whatever else they want to see. Do anything to get that money!
You will want to prepare a written agreement about any loans. If you don’t, bitter arguments are bound to sour the relationship eventually. Even some minor detail, such as the timing of interest payments, can cause great friction if arrangements aren’t backed up in writing.
Don’t be surprised when your friends and relatives suddenly turn into business tycoons once they have agreed to lend you funding. They may insist on terms that are more stringent than those you might get through a commercial bank!
Asking Your Friends and Family to Finance Your Business Is Rarely Fun
Have I asked relatives to lend me money? Sure! Was it fun? No, it was terrible! My maternal grandfather turned me down! He had tons of money, but he had recently gotten burned on another business loan. Did he consider his grandson to be something special? Apparently not.
I did borrow a little money from my father, an ex-banker. Boy, was that a process! He had me sign documents, and, unlike the bank, had me send him interest every single month. If I was a day late I heard about it very, very quickly!
Should I Ask for a Loan or an Equity Investment from a Relative or Friend to Finance My Small Business?
If you are looking to get money from a relative or a friend I suggest you try to get a loan, not an equity investment. This way you don’t dilute your ownership if the business takes off.
But it’s more than just that. A friend or a relative who makes an equity investment in your business, however small, is highly likely to tell you how to run your business, whether you like it or not. In addition, you end up in a messy discussion of what the true profits are, and what expenses should or shouldn’t be deducted before his or her portion of the profits is determined.
But if the only way you can fund your business is with an equity investment from friends or relatives, then go for it! Maybe you can get them to make part of it an investment equity to give them some upside and part of it a loan to protect their downside, thus minimizing the dilution to your ownership stake and to your control of the business.
If I’m Getting Financing from Friends, Do I Need to Form an LLC?
If you are taking on outside investors, it might be more appealing to them if you form a corporation, an LLC, or a limited partnership. This way, they are not responsible for the debts and liabilities of the business if they make an equity investment and the business goes south.
Because getting loans from friends and relatives has become so common, there are now companies that specialize in handling such transactions. They help with the paperwork and act as an intermediary for payments. This helps professionalize the process, and it might be appealing to your reluctant rich uncle. My advice on this? Of course I’d first opt for the cheapest way out, but if a service like this helps secure funding from family and friends, then go for it!
Do I Really Have to Ask a Relative or Friend for Money to Finance My Small Business?
The bottom line is that we all hate—hate with a passion—to ask friends and especially relatives for money. But sometimes you just have to do it. And if I did it, then so can you.
Takeaways You Can Use
- Don’t be afraid to ask friends and family for money.
- Try to get a loan instead of an equity investment.
- Approach them with a detailed proposal as you would a bank.
Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.