Borrowing money from your friends and family can be a tricky business. The risk of ruining your relationship with the people who loan you money is probably one of the biggest concerns. Even if you have one of the best small business ideas on the planet, you need to think about how you ask folks to invest. If you do it right, you’ll get the cash, the business, and strengthen your relationships. If you blow it, you’ll pooch all three. Many years ago, I needed to borrow money from family and friends. I did so, got what I wanted and paid everyone back. We’re all still one big happy family. The whole process left everyone’s money and marriage intact.
Photo by alancleaver 2000 via Flickr
Here are the steps I took and what I suggest you do:
1. Formulate a best case and worst case plan that’s realistic.
Please be realistic. Imagine that your brother-in-law comes to you for money. What kind of plan would you want to see? Make sure you have that plan ready to go.
Clearly spell out a time line for your business and the cash flow it is going to generate. Have the best and worst case scenarios spelled out. Know when it’s reasonable for you to repay the loans.
2. Run your plan by someone else.
Once you’ve formulated your plan, show it to someone smarter than you. You may have forgotten something. If they have suggestions or criticisms, don’t try to prove why they are wrong. Work hard to see how they are right — especially if they throw you a curve ball.
3. Make a list of the people you plan on approaching.
With a good written plan, think about who you’re going to approach. Just because somebody has money doesn’t make them a candidate. Only go to folks who are reasonable, can afford to deal with the worst case scenario, and aren’t a pain in the butt. Once you borrow money from someone, they become your partner. Friends of Don Corleone in the Godfather learned that the hard way. You don’t want to sleep with the fishes….do you?
4. Have no expectations.
Don’t expect anything from the people you decided to approach. Go in with an open mind and welcome their refusal. Tell them that up front and mean it. It’s the only way you’ll be able to keep the relationship in tact.
5. Have a plan B — what happens if you don’t get the money.
Before you talk to anyone, think about what might happen if everyone says “NO”. What will you do? If it means the business fails or doesn’t get off the ground, can you accept that? You must be able to accept that.
If not, you’ll be going in with too much energy and stress.
Once you can accept your worst outcome, you’ll be able to maintain your relationships regardless of how things turned out.
6. Live up to your promises.
No matter what, you must deliver. If it means getting a second or third job to do so….do it. You are only as good as your word. Excuses don’t mean a thing. People aren’t stupid.
If you follow these steps, you’ll be able to approach your family and friends for money without jeopardizing the relationship. On top of that, you’ll have a great chance of getting the cash you need.
What was your experience raising money from family? Did it go well? What were the critical success factors? What would you do differently today?
Neal Frankle found himself in a financially fragile situation at the age of 17. Both his parents passed away while he was still in high school, leaving behind a small insurance settlement. Neal sought out a financial advisor to help him invest his nest egg so that it would help put him through college. Instead, the advisor charted a self-serving course and was on the verge of burning through the money when Neal realized what was happened and fired him just in time to avoid losing everything.
The experience had a deep impact on Neal and formed in him a lifelong desire to help people learn to make smart financial decisions. Today, with more than twenty-five years of experience in the financial services industry, Neal is an author and avid blogger. To learn more, visit Wealth Pilgrim.
Great article post. I love the formulated plan and showing your family and friends what to expect. Lending money to family and friends can be a sensitive topic and being accountable to them helps them feel more at ease in the process.
Good article. When I started my business repairing fixer-upper houses and renting them out, I received loans from family and friends for repair costs on the first fixer-upper that I purchased. One technique that I used was to incorporate into the business by letting them help with the repair of the house. Some of them worked free, and for others I paid a modest hourly sum. It made everyone feel like they were a part of the business as we all pulled together to get the work done. Ralph Waldo Emerson stuck by the motto “Ne to quaesiveris extra” (Do… Read more »
It is really great article about removing the risks while starting up for a business.
You can depend on your family, friends, colleagues for funding. It will save your time for filling lot of loan applications and will also remove the stress.
I have been wanting to do this myself and have discussed this possibility with my brother and sister. They seemed to be both in approval of my ideas but when the time comes that I started really getting serious about it, my sister all of a sudden started ato get cold. She’s always been this type of person anyway. I may have to find other sources.
Maybe a good article would be: How to ask your family to STOP wasting the money you make for your small business? Recently in my and other people experience that’s the thing their families were doing, they were used up to instant gratification and didn’t understand investment and long-term thinking.