In difficult economic times, you may find it impossible to get a traditional loan for start-up or expansion, so you may be considering turning to family or friends to help you withe your business financing. Here are some tips for borrowing in these situations without destroying the relationship.
Consider a Co-signer Instead
If you have a family member or friend who has assets to pledge, you might ask that person to co-sign a loan for you instead of directly giving the money. As a co-signer, the individual doesn't have to give up money but only has to give assurances to the lender that the loan will be paid back if you default. That might be easier for someone with retirement funds who doesn't want to give them up.
Borrowing, not Investing
Consider the funds as a loan, not an equity interest in the business. A loan contains fewer "strings" and conditions. You pay it back, and you're done. An equity interest means the person wants a say in the business operation. Depending on the person and the type of business, this may not be feasible or desirable. Stick to borrowing.
Document the Loan
Put everything in writing, including all the terms of payback, the interest rate, and what happens if you default on the loan. Keep the loan an "arms length" transaction, as if there were no personal relationship. Don't accept just a handshake; put it in writing.
Pay Back the Loan
Pay back the loan, starting as soon as possible. Immediately, if you can. Don't let the loan sit out their unpaid. Start making payments, even if they are small. Determine an amount of interest on the loan, even if the lender says it's not necessary. Your paying back the loan and including interest is a great good-faith gesture, and it may save the relationship.
Consider an Outside Service
Consider using an outside loan servicing organization such as LendFriend, to keep the loan process separate from your personal relationship. There's nothing more devastating to a holiday dinner than having someone ask, "What about last month's payment?" The servicing organization can send out bills according to your agreement, collect payments, and deliver them to your lender.
If the person really wants to participate in the business, consider bringing the person in as a partner, but as a limited partner rather than a full (general) partner. A limited partner has less say in the day-to-day operations, which might be easier for you in running the business. The person might also be more comfortable with having limited personal liability.
Having an agreement in writing, setting out all the terms and conditions, and agreeing on the "What if" situations will help you keep your family and friends in the fold instead of making enemies.
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