Raising Money: 5 What If Questions to Ask Before Approaching Family and Friends for a Loan
Five important facts could stave off nightmares of ruined kinship. Money is very much needed to be very successful. Getting a loan from family or friends should have a smart set of considerations that will leave your relationship intact. Evaluating each of these considerations by contemplating them aloud and writing them out will allow the journey to be a positive experiment. Nothing is guaranteed, so protect what you deem valuable. Little else affects family and destroys friendships more than a money loan.
A few steps to avoid trouble starts with laying the groundwork of what ifs.
What if No. 1: If things go wrong, how do we keep from destroying the aspect of our relationship that we most respect? This conversation will eliminate a friend saying, “I had no idea you could lose all of my investment.” Plan on trouble from the start.
What if No. 2: Getting a legal document that includes all of the details will be necessary, so an attorney is a good place to start. Keep legal paperwork simple. You don’t want the attorney to make more than the loan. Have a legal plan for repayment if the investment goes bad. A contract adds value so everyone knows this is business — not just friends and family playing with each other’s feelings.
What if No. 3: Ask for a lot of money, so you don’t fail before you have had time to get traction as a business. Shortsighted funding requests might send you back making another request or result in underfunding. Budgeting and capitalization planning with friends allows for examining future expenditures. Knowing how much is needed helps showcase a level of preparedness to family and friends.
What if No. 4: Research your business with your friends and family. Share the business insights that you learn as your business evolves. The role of family and friends grows, as they understand the trials and issues associated with the business.
Friends and family as investors stay on the watch for information to help make sure their investment survives.
What if No. 5: Keep it businesslike. From the interest rate of loan to the amount of equity in the business, be fair. Don’t have business terms for the loan that are not a win-win for your friend and family member. You don’t want your request to seem self-serving and half-baked. Friends enjoy friends who can prepare great meals, business plans, and profitable opportunities. Get a loan from a friend like you would borrow a lawn mower; return it because they want to mow their own yard.
Friends make loan to friends, but don’t let friendship blind the business route you take. A profitable friendship includes all of the considerations mentioned here and more. Loans are not gifts, but a friend is, so make sure you protect the special reason the friend will make the loan. Role-play the best and worst case scenarios before you put your friendship to the test. “What if” is the question that must be acted out first. Lastly, ask your friend and family what if I am not able to pay you back? Listen and know what is at risk.