The Dos and Don’ts of Borrowing Startup Money From Family and Friends

As a bootstrapping business owner, you may have difficulty securing startup funds from traditional sources. Fearing repayment problems, many financial institutions avoid extending loans to organizations that have not yet demonstrated their profitability. As a result, more and more business owners are looking to friends and family members for help in getting their startups off the ground. While such arrangements can be beneficial to both you, the business owner, and your loved ones, it’s a good idea to formalize the loan with a written agreement. Below, we’ll take a look at the top dos and don’ts of entering into a loan agreement with your friends or family members.

Do:

Get it in writing

Regardless of the amount of money you’re borrowing, you should put everything in writing. Your loan agreement should be as specific as possible with respect to the total amount of money being borrowed, how the funds will be used, the proposed repayment schedule, and any interest owed. Any changes to the original loan terms should be made official with an amendment to agreement.

Present your business plan

Just as you would if you were borrowing money from a bank or a credit union, you should provide your family and friends with a clear, well thought out business plan. Your business plan should include a general overview of your organization, accurate financial forecasts, and a repayment plan that works well for all parties.

Be transparent

Be honest with your loved ones about what is going well with your business and what could be better. A good idea is to provide your financiers with monthly email updates so they can monitor your startup’s progress. If things aren’t going as well as you’d hoped, your loved ones may be able to provide the contacts, referrals or advice you need to get back on track.

Don’t:

Borrow more money than you need

Extra money is nice, but not at the expense of your personal relationships. Borrowing the minimum amount of money you need will make repayment easier and help you build good faith with your backers.

Accept “gifts”

What you consider a gift may actually be a loan in the minds of your family and friends—especially if your business succeeds. An official document, or even a simple written IOU, will hensure prevent such misunderstandings.

Let business ruin your relationships

One of the disadvantages of borrowing money from family and friends is the potential damage to your personal relationships. To avoid conflict, be sure to repay the loan in full and on time. Doing so will establish trust going forward and allow your loved ones to fully appreciate how they’ve helped support your business.