SmallBizResource Blog -- Startups

Hitting Up Family & Friends To Finance Your Biz? Read This First

Posted by Gayle Kesten Monday, Mar 17, 2008, 11:40 AM ET

Many moons ago, my dad did a plumbing job for a longtime family friend. He billed her only for the parts, despite giving up half his weekend to help her out. (My dad's that kind of guy.) Unfortunately, said friend never paid him, the relationship became strained and ties were eventually severed.

Off the top of my head, I can also think of two pairs of brothers who went into business together, only to fight worse than when they were kids. In time, both partnerships dissolved, and siblings spent years not talking.

So I'm skittish about mixing business with pleasure. That and I hate owing anyone a dime. Maybe I'm in the minority; according to blogger Jeff Cornwall, as much as 85 percent of start-up capital for new businesses comes from the entrepreneur and his/her friends and family. I'm sure there are plenty of happy endings among that group. (I'd love to hear about them.)

Whether you're the borrower or the borrowee, it's especially important to think with your head even more than your heart. Some good advice from CNBC: Although these are folks who trust you, you want to legally formalize the loan with everything from the terms to the timing. Talk about your family members’ expectations upfront, outlining the worst case scenarios: What happens if you default on the loan? Clarify that the money they lend to your business doesn’t give them a vote in how you run it.

You may very well need to involve a lawyer or a service like Virgin Money to help manage the loans (nod to Barbara Weltman and her always helpful Small Business Idea of the Day for pointing out the latter). But no matter how you go about it, the editors at StartupNation suggest you create a schedule that's friendly to yourself and your venture, with payments arranged in set intervals and that take into account times of the year when business could be slow.

An official loan agreement, they say, should consider the following:

Any special payment arrangements, such as no payments for the first year, interest-only payments, seasonal payments, etc. (optional)

Call me a nervous Nelly, but a little finger-crossing couldn't hurt either.

Startups

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