Nowadays, it’s become nearly impossible for start-up companies to get loans. So what do you do if you have a brilliant business idea, but no funds to get it started? You find family and friend investors. It’s not always the best idea, but sometimes it’s the only answer.
So if you find yourself asking loved ones for money to help get your idea started, you still want to look as professional as possible.
Here’s how.
Pitch
Treat your friend/family the same way you’d treat any investor. Show them your business plan, projections, etc. Have formal meeting and make sure you dress up for the part. You want to prove to them that you are serious about your new venture.
Document
Once Auntie Susan agrees to lend you the money, you’ll want her to know you’re serious about the loan. Create a document explaining that the money is actually a loan (with or without interest) and detailing the terms. If you do this wrong, the IRS may think the loan was a gift and impose gift taxes. You don’t need a lawyer to draw up the papers, there are easy on-line services like Prosper Inc. and Virgin Money that help with documentation and payment schedules.
Be Clear
If you don’t think you’ll be able to pay the loan back in full, be clear about your intentions. Once your formalize with documentation, you are liable by law. Don’t raise expectations if you don’t think you can meet them. Also, put everything out on the table. You don’t want any unspoken strings attached to the loan. Be honest and ask questions even if you’re nervous.
Follow Up
Once you the business is up and running, update your lender. Let them know about all the wonderful things you are doing with the money. They won’t feel as nervous if you update them on your progress.
