Startup business loans through family and friends

For most small startup businesses, family and friends usually seem to be the most natural and easiest source of capital.

Other formal ways may require formal procedures, which is not the best or fastest ways, especially for a business just beginning to lay its foundation. Besides, the banks or loaning firms may not believe in your capability, but your family and friends do.

With family and friends, there are no concrete rules, unless you decide to draft some. Also, there is no limit on the amount of money the family or friend lender can inject into the business. All you have to do is to provide a practical and clean business plan.

However, as appealing as loans from family and friends may seem, they can also have their downside. We shall look at that much later. First, let’s look at the various ways through which you can get small business loans from families and friends.

Ways of acquiring loans from families and friends

Monetary loan/Debt

One of the obvious ways of getting financial assistance for your business from family and friends is through debts. This is simply borrowing money and working out a plan on how to pay back. Most people prefer this as it is simple and straightforward. You could read more about it on via OnDeck.

Equity

Another way of getting capital help from families and friends is by allowing or requesting them to invest in your business. With this, they can share the profits and ownership and, therefore, get returns of what they had invested. This can go on as long as the business exists, or until he gets back what he had invested. As BusinessLoans.com puts it, this is a good option, especially if you are not confident you can pay back the money.

Equipment financing

If you are starting up a business that requires equipment, a family member can always chip in to buy one or two equipment. You can treat this as a loan or an investment; whichever works for both of you.

How to go about it successfully

Family and friends are the most casual relations one can have. Because of this, you may also take the loan as casual. Thisis quite unprofessional and often does not work out well for most people. To boost your discipline and ensure you maintain the good relationship between you and the lender, you have to lay down some rules.

Provide a clear business plan

No one would invest in a business they know nothing about; I wouldn’t. So, before approaching your friend or family, first, come up with a clear and easily understandable business plan. One which explains clearly what the money being lent or invested is to be used for.

Treat the money as a loan and not goodwill

Just as mentioned above, most people often take for granted the loan they receive from family and friends. This should not be the case. Before you receive the money, sit down with the lender and come up with ways of paying back, time and interest if there is. You should then ensure you follow the agreement to the letter. This will show your appreciation of the help, as explained by Ondeck.

Borrow only what you need

What do you need? Often, it is difficult answering this question especially if you know the capacity of the person. However, let what you request for, be what you need and what you can pay back, rather than what the person has. This as well boosts your discipline and improves your spending behavior.

Let the lender know about the risks involved

Never count on the sympathy of anyone if your business fails, not even your friend’s or family’s and especially one from whom you borrow money. If there are risks involved in the business you intend to start, explain them clearly to the lender and let him or her know what is to be expected. This could be difficult since it may stop someone from helping out. However, it is clearly explained by Forbes that having to explain how the money got lost after the business has failed is much more difficult.

Advantages and disadvantages of loans from family and friends

Fast

If you need a loan for your business within short notice, your family and friends are the best choices. If the money is available, all you need is to brief the lender about the business and work out an agreement. There is no time needed to produce a document and wait for the loan to mature.

No or minimal interest rate

It is quite unlikely that a friend or family lender will charge you interest. However, even if they do, it will not be as much as a bank or a loaning firm will.