By Evan Vitale
Over the past few months, this blog has looked at many funding opportunities for startup businesses, including venture capital, equity financing, bank and Small Business Administration loans and crowdfunding.
However, based on your current credit and cash situation needs, you may not be a candidate for VC money or an ideal customer for a traditional loan for a bank. If you are low on self-funding options, you might give some consideration to seeking a loan or an investment from one or more friends or family members.
Family members know you and your personal character (that can be good and bad). They can consider some options that banks won’t consider. However, approaching a family member or a good friend for a loan adds an extra level of “pressure” to all parties involved.
You, for example, might find it difficult to call your parents; siblings or an aunt or uncle and ask for a loan. On the other hand, they are going to have to make a difficult decision whether they answer “yes” or “no” to your request.
It can be extremely uncomfortable. If they say “no” will it cause harm to your family relationship? If they say “yes” and there is a repayment problem, then there are other concerns to consider.
However, if you approach a friend or a family member – just like you would a bank or a private investor – everyone will appreciate your business-like approach to the matter. Here, you should share your business plan, how much financing you are seeking, what interest rate you are willing to pay and a full payback plan (including a monthly payment plan).
Taking the professional approach to a loan from a friend or family member allows them to ask questions and feel more comfortable about loaning you the money you need for your startup. In either case, never take advantage of a family member or friend. Always remain professional, upfront and honest with them about your plan and how you are going to repay the loan.
If you are asking for a large sum of money, perhaps you can ask for smaller loans from multiple family members or friends. If trust and payback plans are a concern, you might start out with a small loan request to show you’re capable of paying back loans to family members.