For many startups, it can be very hard to have the financial reputation needed to secure financing from traditional sources. While getting money from a bank might save your pride from taking a hit, it could also require you to jump through a lot more legal hoops that you’d rather not have to deal with in addition to starting your own business. Luckily, many people have family or friends that they could speak to about backing their business financially. However, this often means treading on some uneasy terrain. So to help make this process easier on everyone, here are three tips for borrowing startup money from family or friends.
Treat The Person and Relationship With Respect
If you love and trust someone enough to ask them to invest in you and your new company, it’s important that you always remember to treat that person and your relationship with them with respect. This means that you should conduct your appeal for financing in a professional manner. Intuit Quickbooks suggests asking the person to lunch or drinks and informing them that you’ll be speaking to them about an idea you’ve had before they come to the meeting. This will give them the chance to think about the upcoming proposition rather than being put on the spot. Also, be understanding if they decide not to invest. Your relationship is more important than the money.
Get It In Writing
Once someone agrees to give you some funding for your startup, it’s important that you get all of your agreements down in writing. While they may say to you that they want nothing in return, things could change over time. Knowing this, the staff of Entrepreneur.com recommends documenting things like how much money was given, what you plan to use that specific money for, and if there are plans for repayment. It will also be a good idea to make sure some kind of legal counsel consults this agreement to ensure that both parties are covered in the event that your relationship turns south and this financial exchange gets brought into the mix.
State What Their Money Means
Typically when someone invests in a startup, they receive something in exchange for their money. While this can be different when it comes to getting financing from family and friends, make sure both parties know exactly what this money means for each party. BusinessLoans.com shares that startup money often is classified either as a loan or equity. With equity, the lender owns part of the business and can make some decisions regarding the business. With a loan, repayment of the loan with interest is implied. Take the time to state what the money you’ve been given will mean to the lender so you’re both on the same page here.
If you plan to ask your family or friends to invest in your startup but aren’t sure how to go about doing this, use the tips mentioned above to help you navigate this new territory.