Thinking of borrowing money from family and friends? Follow This Etiquette – The New Indian Express

When you start your own business, you will surely need capital. I am not talking about Rs 2,00,000 or Rs 25,00,000, the amount does not matter, it depends on your business. It is quite obvious that you will turn to your friends and loved ones. So how should you proceed? Here are some tips you can follow:

  1. Talk to them AND write to them. Tell your friends and family that you are going into business and need money, and ask for money. Some of us will find it very difficult to ask, so a letter or email can make things easier. Choose your options.

  2. Tell them it’s a risk to lend you money. This is exactly why no bank wants to lend you. You have no track record, no borrowing history, you’re not sure you’ll succeed, and 97% of start-ups fail within the first year of operation. Yes, you have to put him down, but you should tell them this.

  3. Your father, uncles, aunts, cousins ​​are the best source, so start there. If your dad says yes, clearly state how much is loan (debt) and how much is equity (repayable if possible, or they could be lost). The part of the debt must be repaid from your future income (salary) in case you give up this business. It needs clarity.

  4. When a friend of mine borrowed Rs 1 million from his father, he still needed Rs 2 million to buy a shop. So he borrowed from a friend’s father (who also happened to be his father’s friend, and the amount was Rs 1 million). His dad threw a tantrum and said, “If you lose Rs 2 million, I’ll have to pay my friend.” He won’t ask me, but he REALLY lends me, not you, so please borrow more from me “and not from my friends”. Go make your own circle of friends and borrow from them, not my friends. This clarity is very important.

  5. Ask them to donate as much money as they can afford to lose without losing their relationships.

  6. I lent Rs 50,000 (in the 1990s) to a friend who was unable to do business. I was stupid and naive. However, what hurt me was not losing the money, but the fact that he never came back saying he was lost. He is now doing great, but hasn’t even bothered to return the principal. It is criminal. You must communicate. Regularly.

  7. Have it in writing. It helps in the income tax hearing, if and when it happens.

  8. Buy assets on behalf of the lender. If you MUST buy a property worth Rs 50 lakh, and it is your father who is investing the money, buy it in his name. And tell him you’ll buy it back from him in, say, five years. That way, the only money he gives you is the rent he waives for five years, it’s easier.

  9. Tell them how you will repay the amount, or how you will NOT. If I invest in your business, say Rs 2 million, I want to know what you will do with the money. So tell the borrower how you are going to use the money. Tell him how you will repay. If you pay interest, how much. In fact, if you want to pay, say, 12 years of interest, just tell him you’ll buy back his shares at double the price in six years. It’s smarter than offering to pay interest; your cash flow may not allow it.

  10. Your investor (big lender) should also know if things go wrong. If at some point you sell your business and can only pay part of the capital, let the investor/lender know. He has a right to know from you and not from another mutual friend. It hurts more.

  11. Your investor invested Rs 1 million in 2016 and you told him that you will repay him in 2023 up to Rs 2 million. Great! This meant that the shares you sold to him for Rs 10 are bought from him at Rs 20. He is a friend and he was happy with that. Now, in 2020, Softbank is offering you fresh money at, say, 350 rupees per share, but they don’t want your old shareholders to stay. You offer 20 rupees to your investor saying that instead of 20 rupees in 2023, you prepay in 2020 itself and he gets a great return. Of course, he saw the report on Softbank ready to pay you Rs 230.

  12. Determine what you will do. NOW! Long before borrowing.

VP Subramanyam
Written on www.subramoney.com and is the author of the bestseller “Retire Rich – Invest C 40 a day”.

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