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Idea Cafe's CyberSchmooz
Financial Feasts

Financing message forum where you can get and give insights found nowhere else. Belly up to the table and request funding. Or tell your money tales. Any money talk is fair game except ads.

The Latest Hot Topics:

Show Me the Money!
Belly up to the Financial Feasts table and talk turkey about money... what to look for, where & how? All money talk is fair game. Go

 

Friends and Family

1. Why Get Financing from Friends and Family?

2. Who is This Good For?

3. When is This the Best Choice for Me?

4. When is This Not Advised?

5. Tips for Getting the Money.

6. Ingredients You'll Need on Hand.

7. Idea Cafe Tips.

8. Watch Out For...

9. Web Links.

1. Why Get Financing from Friends and Family?

What's more handy and logical than starting and building your business with financial help from your family? Not much, especially in some families and cultures where this method of financing is taken for granted by everyone involved.

But while your family may be willing (or even eager) to help you build the business you dream of, this close, convenient financing can backfire and make you wish you'd looked a little farther from home for the money.

2. Who is This Good For?

You've got to have a strong stomach to ask people you care about to invest or loan you their savings for your company If something goes wrong, the problems (and possibly your perceived failings) may be dissected over family dinners for decades to come.

You need only a few hundred or thousand dollars -- so little that a bank won't want to be bothered with you.

You're new in business and haven't established credit.

3. When is This the Best Choice for Me

After you've demonstrated confidence in yourself by putting in absolutely everything you've got, says Mark Rubin, a principal with The Metropolitan Group, a Leonia, NJ consulting firm that specializes in family businesses. "You've got the most at stake, so you should have the largest vested interest," he says.

4. When is This Not Advised?

When you can qualify for other financing sources. True, you may pay more interest to an outsider, but that may seem cheap when compared to the psychological price you might pay for giving up your independent stature in the family.

When it's a big sacrifice for the family member or friend to extend their money to you. Be sensitive to their real capabilities, and only accept their money if you know they wouldn't really be affected if something happened and you couldn't pay it all back as agreed.

When there's already enough friction in the family that you don't want to be the cause or the recipient of more flare-ups.

5. Tips for Getting the Money

Your great-aunt might not ask for a balance sheet and income statement, but an uninformed investor, of any sort, is a time bomb. Provide relatives and friends with the hard facts about your business venture, emphasizing the risk involved.

Quell your loved-ones' queasiness by tackling it head-on. Explicitly talk about the ways that you'll maintain boundaries between your relationship and the financial investment: "No discussions of return on equity at the movies."

6. Ingredients You'll Need on Hand

  • A standard promissory note and an hour or two of your lawyer's time to tailor it to the terms you and your lender agree to.
  • A written note (in case someone forgets later) spelling out your agreed boundaries between biz and family issues, such as: "We agree not to discuss business at family meals."
  • A dispute-resolution agreement that spells out how you and Uncle Stu will avoid coming to blows should either of you fail to keep the terms of the loan. Would you rather take it to a lawyer, to mediation, or grandma? Decide while you're still on speaking terms.
  • Basic financial package.

7. Idea Cafe Tips

People get funny about money. Taking money from a friend or family member often puts the relationship on edge until the agreement is fulfilled as promised. And it means now your financial affairs are no longer private. Can you stomach hearing them discussed around the Thanksgiving table year after year?

If anything goes awry with the money, it can taint the personal relationship for years or forever. Even if everything goes right, others may become jealous of your success, instead of joyous.

So, look before you rush to take advantage of that familiar, comfortable source of money. It's not free and it may turn out to be much more expensive than you bargained for, so heads up!

8. Watch Out For...

Consult with your family lawyer about how the loan or investment might complicate estate planning issues.

Unintentional arm twisting. Some relatives may feel they have to invest or risk jeopardizing your relationship. You want them to feel their choice to invest or loan you money was a reasonable business decision, not a bribe to keep you from badmouthing them to Grandma.

Disclosure discomfort. You may have to reveal a great deal about your personal financial situation in order to demonstrate that you've devoted all your available resources to the business.

Your business becomes the family business. Okay by you?

9. Web Links

Family Firm Institute
A membership organization for consultants, educators, advisors and professionals serving the family business.

Venture Associates Ltd.
A Denver financial consulting firm run by James Arkebauer. Information on tapping friends and family for financing, as well as finding angels, venture capital, investment bankers, management consultants and more.

 

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