There is always the risk that your personal relationships will become jeopardised after someone has lent you money. If you’re about to borrow from a friend or family member, here are a few helpful pointers to avoid running into problems later down the track:
Are you seeking many small investments or several larger ones? In many ways, it’s easier to repay smaller debts. It’s also more difficult to destroy a friendship if it’s only over $50.
When you have a smaller pool of investors pledging larger amounts, you must be more prepared to accept the increased risk. This option might work for you if you’re working on a tight schedule.
The offer is important
When you get a loan from anyone, they’re expecting to be repaid by whatever means you agreed to.
Make sure your offer is within reason. Do you want others to own equity before the business is even off the ground? Consider which option works for you and your business, perhaps a token of thanks, such as those offered on Kickstarter.com, would be more appropriate.
Remember that once you take money from investors, you might be required to give a piece of your business away, and potentially make these investors board members. Even your family and friends will expect to be repaid in some way or another.
Don’t forget, loans have to be repaid by their agreed repayment date, which can affect the cash flow. Staying profitable is key, and having 100 micro-loans to pay back at the same time could seriously impact on the company profits.
Keep your wits about you even when receiving gifts. These gestures of goodwill should be acknowledged as such in writing. If you can manage, get the party to acknowledge the no-strings-attached nature of the loan.
Know your pitch
Your friends and family are probably not interested in reading a long business plan. Instead, they’re probably more interested in discussing your business ideas in a less formal setting.
Summarise your ideas into a smaller document and explain clearly your ambitions for the business, and more specifically what the money will be used for. This is the most important thing to communicate – where the money is being invested and for what purpose. What are the risks and competition you might face? These are important details that are both important for the business and the investors’ confidence.
Don’t be too informal with your documents. Record all of your correspondence with friends and family that relate the possible loan agreement.
If you are planning on offering equity in the company, get a lawyer to review the documents and the general terms of the agreement to make sure you’re not giving too much away.
Don’t offer what you can’t afford
When you get a loan from a friend or family member, there is less pressure to report progress and provide updates, however, this shouldn’t be overlooked entirely. Any type of investor, whether you know them personally or otherwise, will want some sort of regular insight into the progress of the business.
Be frank about the positives and the negatives. Tell your investors what needs work and what’s working. At the end of the day, these are the people that will care most about the success of your business, regardless of their own investment. Get as much advice from them as you can.
Getting people to invest in your new business idea is never as easy task. Sourcing funds from friends and family is certainly not uncommon and should be utilised as much as possible. Having said that, it’s just as important that you manage your investors’ expectations and give them the respect they deserve for taking a risk by investing. When you’re in doubt as to the type of offers you should be making, call LegalVision. We’re a start-up ourselves and our legal advice could be valuable to your business.