Can You Get Financing From Your Friends and Family?

It’s that time of year when your loved ones are making their holiday gift lists and hinting (or outright asking) to find out what you’d like to receive. Is it OK if your answer is “Financing”?

Getting financing from friends and family has long been one of the most popular ways small businesses got started. But for many people, the recession has put a crimp in this source of financing. After all, when Aunt Edna’s 401(k) was tanking in 2008, it was hardly the tactful time to ask her if she could spare $10,000 to help you launch a business.

Today, however, things are looking up. Hopeful signs are appearing on the economic horizon; consumers are spending a bit more freely; and big corporations are reporting record earnings. While unemployment is still high, most Americans are more confident the worst is over. If your friends and family members are among those feeling optimistic, now could be the perfect time to turn to them for an investment or loan.

Choose your investors wisely. Look for friends or family members who can offer not only money, but also experience and advice. For instance, if you’re seeking the capital to expand globally, do you know anyone with experience growing a global business, or who has connections overseas?

Consider the person’s finances. When word gets out you’re seeking capital, you might find some family members offering to lend you more than they can really afford. Never take money from someone who can’t afford to lose it, and make sure anyone who does invest fully comprehends the risk.

Pitch professionally. Give your friend or relative a professional presentation, just like you would with any investor. They need to receive a copy of your business plan and be able to ask any questions they may have.

Make it legal. Handshake agreements rarely end well. Even if it’s your father-in-law who’s investing—make that, especially if it’s your father-in-law—have an attorney draw up a written agreement, and go over all the details of the deal with your accountant. Make sure the investor or lender clearly understands all details of the exchange, including tax ramifications (you want to avoid gift taxes) and his or her role in the company going forward.

If your friends and family do come through with the cash you’re seeking, pay them back—not only financially—by keeping them up to date on the company’s progress. Of course, any stockholders must be apprised of your business’s latest doings at an annual meeting, but you should also keep anyone who’s helped finance you updated on the business’s growth. Check in via phone or meet every few months for lunch to tell them how things are going. They’ll be happy knowing their investment is paying off in more ways than one.

DISCLAIMER: The information posted in this blog is provided for informational purposes. Legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. The information presented here is not to be construed as legal or tax advice. Network Solutions recommends that you consult an attorney or tax consultant if you want professional assurance that the information posted, and your interpretation of it, is appropriate to your particular business.

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