Loans from Personal Sources
1. What is it?
2. Who's this good for?
3. When is this the best choice
4. When is this not advised?
5. Tips for getting financed.
6. Ingredients you'll need on
7. Idea Cafe Tips
8. Watch out for!
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.
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
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.
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
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.
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
7. Idea Cafe
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
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.
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.