Borrow Money From Family and Friends and Keep Relationships Intact

Borrow Money From Family and Friends and Keep Relationships IntactIt’s so fun to watch a fellow entrepreneur win investment on Shark Tank to make her dream business into a reality. Likewise, every time a small startup is selected by the likes of Y Combinator or Techstars, hope rises for all founders. But actually, the vast majority of entrepreneurs get their start through personal savings, traditional bank loans or help from family and friends.

When you decide to found your own business or take your side hustle full time, you may also need a little help from your friends and family. There’s nothing wrong with turning to those you know for early seed money, but to protect everyone’s interests, and your relationships, it needs to be done with clear-eyed intention and a professionalism that addresses practicalities like payback periods, interest and ownership stakes in the business.

With a little help

A study by the Kauffman Foundation, a nonprofit that works to boost entrepreneurship, found that about two-thirds of small businesses were first financed through some combination of bank or other loans, personal savings and friends and family. Angel investors only accounted for about 6% and venture capital a little less than 5% of early funding. Even looking only at the fastest-growing companies in the country, they still found only 7% investment from venture capital.

Of that pie, women and people of color receive only the tiniest sliver. In 2021, companies founded solely by women received only 2.2% of the total capital invested in venture-backed startups in the US, according to PitchBook. And only about 1% of venture capital dollars go annually to Black and Latinx founders, according to Forbes. Minority-owned businesses also have greater difficulty than their white peers securing small business loans from banks and other lenders. When they do, they are often offered lower amounts with higher interest rates.

While many organizations, including Monica Motivates, LLC, are working diligently to change these stats with significant education and outreach efforts, including our Pitch University program, the bottom line is that the people you know best may sometimes be the best ones to turn to for needed investment in the early years.

If you are considering asking family or friends for money to invest in your business, apply the same level of diligence, data and discipline you would if approaching a bank or other lender. Consider these guidelines for creating a conversation and terms that have the potential to support your business while safeguarding important personal relationships.

  1. Have a serious conversation. It can be tempting to take a casual approach when talking with family and friends, or even to bring up the idea of a loan on the spur of the moment. That’s a mistake because money is always a serious topic. Schedule a time to meet when you will be undistracted and give the other person a heads-up that you want to discuss an opportunity related to your business.
  2. Make a pitch. Prepare a thorough, if not formal, presentation about your business to help your audience understand the opportunity. This will not only demonstrate that you are a serious business person and build confidence in your endeavor, but is also excellent practice for you to hone your pitch with a friendly audience. Be sure to cover the potential upside, the risks, the competition you’re facing and how you plan to grow.
  3. Decide on debt or equity. You may prefer to take a loan, or provide your funder with an equity investment in your business in exchange for their capital. They may also have a preference based on their financial situation and personal tolerance for risk. Be clear about whether this is money you will pay back in regular installments, even if the business fails, or if this is an investment that will return a hoped-for profit at some point in the future when the business becomes profitable or is sold.
  4. Capture the terms in writing. Even if you’re accepting money from your parents, the terms of the deal must be captured in writing. This is one of the most important steps to protect your relationships down the line. State clearly in the document how much you are borrowing (or they are investing), the amount and timing of any monthly payments, interest to be paid, what happens if a payment is missed, and whether an investor has any say in how your business operates.
  5. Be open to feedback. Remember those exhilarating moments when one of the Sharks finally says they’re in? It only comes after they have grilled the founder in depth, gotten all their questions answered and even offered advice or specific requirements they want to see in place in the business. You may not be dealing with real estate and tech moguls, but even your Uncle Norman may want his say if he’s parting with cash to help you launch or grow. He may also provide an important new perspective.

No matter what happens in the business, keep the lines of communication open. Update your lenders or investors on how things are going (the good and the bad). Show your appreciation for their support and belief in you. And then, show up for Thanksgiving or your 15-year reunion and simply enjoy time together without talking business at all. The exchange of funds is an important step in the life and health of your business, but it does not supersede the value of your family or friends.