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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

 

Loans from Personal Sources

1. What is it?

2. Who's this good for?

3. When is this the best choice for me?

4. When is this not advised?

5. Tips for getting financed.

6. Ingredients you'll need on hand.

7. Idea Cafe Tips

8. Watch out for!

1. What's a loan from a personal source?

A loan from someone you know. Friends, family, old college roommates (now there's a reason to go to reunions!), business acquaintances.

2. Who's it good for?

  • When you need only a few hundred or thousand dollars -- so little that a bank won't want to be bothered with you.
  • You've got a blemished credit history and prefer to call on people who may be more understanding of the circumstances.

But do you have the stomach for a personal loan? When you owe money to people you know, like and trust, you never forget it. Neither do they. Be sure you can chew and swallow your Thanksgiving turkey while seated across the table from Uncle Stu after he lends you $20,000.

3. When is this the best choice for me?

If banks turn you down, or if you know you won't qualify for a loan or line of credit;

If you need money very quickly and can't wait for a bank's loan department to crank through the paperwork;

It's also a good option for offbeat business concepts that may be hard to sell, or even explain, to a conventional lender.

4. When is this not advised?

When it's not worth accidentally damaging your closest relationships for any amount of money

When you really aren't certain that you'll actually be able to pay the loan back.

5. Tips for getting financed

Offer collateral. Creditors who share your last name can be just as concerned about getting their money back as anybody else.

Treat your personal lenders with respect. Show them your business plan, financials, and give them the dog-and-pony show just like you would for another lender or investor.

color business bar

6. Ingredients you'll need on hand

A standard promissory note and an hour or two of a lawyer's time to tailor it to the terms that you agree to with your lender.

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 loan. Would you rather take it to a lawyer, to mediation, or grandma? Decide while you're still on speaking terms.

A Basic financial package.

7. Idea Cafe Tips

A loan from a personal source may seem like the easiest money since the source knows you, believes in you, and you won't have to fill out endless forms or wait forever for their answer. And they may be more lenient on you when things get tough ... or not. This loan, which seems friendliest going in can be ugliest coming out, since any snag doesn't just affect biz, it dents your closest relationships, too. And you may never be able to repair the damage.

So look before you leap. Although there are personal aspects of this deal, make it as businesslike as possible, supported by signed written documents, and regular progress reports. You'll be tempted to paint just the rosy picture, but be sure to divulge the potential risks, too.

And be sure your lender charges enough interest so the IRS doesn't view this as a "gift" and add the surprise of gift tax.

8. Watch out for!

The emotional entanglements and repercussions. If you default on the loan, you'll be facing not just the anger of a let-down lender but also a disappointed friend or relative.

Confidentiality. Do you want the details of your business and its progress to be the headliner in Uncle Stu and Aunt Frances' next mass-produced holiday newsletter?

The handshake deal. Don't let blind faith, or embarrassment, crowd out common sense. Spell everything out, just like you would for a bank, and get all the relevant signatures. At the very least, complete a promissory note spelling out the interest rate, repayment schedule, and other basic terms of the loan agreement. Keep in mind that any such note is likely to be subordinated debt -- in other words, if you go under, Uncle Stu will get paid back after any bank loans, but before shareholders.

Interest-free loans: This will raise eyebrows at the Internal Revenue Service or other government tax authority. Check with your accountant or lawyer.

 

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