Whether you are just starting out or looking to expand, financing is an essential part of any small business. Proper financing can mean the difference between success and failure.
To successfully borrow money from people you know, it is important that you overcome:
1. Financial Risk: You must demonstrate to people who might be potential lenders that your business has a reasonable chance of success, and that their investment in it is a smart one. Lenders will want to see that you have the necessary skills, have thought about the risks involved and have a plan in place to minimize these risks while growing your business.
2. Emotional Risk: You must convince people who might be potential lenders that investing in your business will not jeopardize their relationship with you. The information, worksheets, and examples contained in this document will help you to overcome this barrier, and bring you closer to getting the money you need. When it comes to borrowing money from people you know, we realize that small business owners will be at different points in the process–some of you may be uncertain as to where or how to begin, while others may already have specific lenders in mind. This guide is organized so you can select the appropriate section(s) based on your individual situation and specific business needs.
The key to approaching friends, family, and other people you know for money is to be open and honest. Focus on the people you believe not only have the resources, but are also likely to have insight into your character and will be interested in your business.
Ask only for an amount that your potential lender will be comfortable giving, and make it clear that a refusal won't offend you or hurt the relationship.
Agree to terms formally in writing, and detail how you will repay the loan. Consider using an outside loan servicing company to manage the payment process and maintain accurate records.
Above all, be as business-like as possible.
Have a question about financing? Connect with a SCORE mentor online or in your community today!