How to borrow money from friends and family without destroying your relationships
With bank loans so difficult to obtain, more and more businesses are borrowing from family and friends for low-cost financing without having to jump through too many hurdles.
But while borrowing from friends and family can be a great way to secure inexpensive financing for your business, it can also be a recipe for disaster, leading to family disputes, relationship breakdowns, and even lawsuits. . Here’s how to do it correctly:
1. Take it seriously. Borrowing money from a family or a friend is big business for you and for them, so treat it that way. Give them a formal presentation so they know exactly what they are getting into. Explain what the money will be used for and provide regular updates on the progress of the business.
2. Indicate clearly whether it is a loan or an equity investment. Are you borrowing money that you plan to pay back? Or do they invest in your business in exchange for an equity stake? Make sure both parties understand exactly what’s going on and the consequences. If it is an investment in stocks, for example, if the business fails, they will lose all of their money – and even if it is successful, they might not be able to achieve. their investment before many years.
3. Don’t borrow more than your family or friends can afford to lose. This is really important and requires very careful personal judgment, especially if the lender is an elderly relative who may well be making financial sacrifices elsewhere in order to help the next generation start a business. If your business fails, it must be a shame, not a crisis; and not so bad that it compromises your parents’ retirement plans.
4. Be honest about the risks involved for your family and friends to embark on the adventure with their eyes open. If they think you’re creating the next Facebook and haven’t done anything to correct that impression, then you and them might be shocked.
5. Determine from the outset the extent of their involvement in the day-to-day management of the business or to decide on the strategic direction of the company, if applicable. If you haven’t set clear ground rules in advance, a relative or friend who has loaned money may believe that then they have a right to participate in decisions about the running of the business. If they come to your office every day with “useful” suggestions, then things could get awkward quickly.
6. Put everything in writing so both parties know what it is. It may sound too formal, but it really matters. If it is a loan, are you going to pay them interest, and over what period of time you will pay them back – in the form of regular monthly sums or lump sums depending on the situation of the business? And what if the business fails? No matter how well you know someone, casual conversation can easily be misinterpreted and mean different things to different people, even then, no matter years later. If you write it down, there is less chance that there is room for a dispute.
Alan Pluck is the Managing Director of Portobello Business Center, a corporate agency that helps start-ups and small businesses. He says, âSet up a schedule of when and how payments will be made, and agree on what will happen if you can’t meet the payments, for example if there may be a break. Putting everything in writing doesn’t necessarily have to go to court, but the process of putting it in writing increases the chances that everything will go well. If it’s in writing, no one can dispute it. “
7. Avoid talking about it on family occasions. Try to separate business discussions from family life and social events with friends, otherwise everyone will be really bored – and then they will get mad at you for spoiling the opportunity.
8. Put family first. If a friend or family member has loaned you money and your business is showing signs of success, then instead of paying off the entire loan, consider offering them a share of the capital in exchange for the outstanding amount. It may cost you more, but if it keeps the peace, it’s a small price to pay. And if you’re not ready to put your friends and family first, think carefully about whether this really is the best fundraising route for you.