The first job facing many prospective business owners is rounding up the cash
necessary to make the purchase. They may find that banks have made borrowing
difficult (or all but impossible), and that even SBA loans have requirements
too stringent to meet. One viable option is obtaining financing from the seller;
another is to seek help from family and friends.
Borrowing money from family members and/or friends is one of the most frequently-used
methods of small business financing. The pluses are obvious–there is trust,
familiarity, and a general comfort level when dealing with those you know.
The drawbacks are self-evident as well: “doing business” with family and friends
comes with cautionary notes of legendary proportions. Everybody knows that
family ventures can be complex and stressful, stirring up “bad blood” and lingering
ill will. However, by taking the right preventive steps, buyers can take advantage
of friendly financial help.
1. Set up an informal meeting to introduce your ideas.
This is the time to “feel out” friends and relatives casually, being sure
they understand that this is strictly a fact-finding (and fact-presenting)
meeting. Anyone who is not interested or cannot afford to be involved has plenty
of opportunity to say so without feeling obligated–or emotionally “blackmailed.”
2. Follow up with a professional business plan.
Those who have indicated interest should now be treated with utmost professionalism.
A formal business plan, including detailed financials, and a carefully-drafted
business contract should be presented at this subsequent gathering. Consult
a business professional for help in establishing a schedule for repayment based
on the appropriate interest rates. Nothing will inspire more confidence in
lenders than the care taken with this vital paperwork.
3. Be clear about the structure of the business envisioned.
How much voice are investors to have in the business? This is a vital question.
Be sure that all parties understand whether this is to be a simple investment
or some sort of partnership, and put this agreement in writing.
4. Take care in identifying your borrowing “targets.”
Sometimes willing and eager family members can’t really afford to invest.
If possible, try to spread the borrowing around so that no one person bears
the crux of the loan. It may take more energy to get smaller amounts from a
larger circle of people, but the safety factors for all concerned will more
than compensate for the time spent.
5. Keep your investors involved.
Once the buyer becomes an owner and the new business is in operation, friends
and family lenders are due more than their repayment. They will want to be
informed and updated about the progress of the business. Keeping in touch is
a cost-free way to return the vote of confidence your friendly investors have
placed in you.