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.
|