(ThyBlackMan.com) Outside of your own wallet, one of the most common places you and other entrepreneurs can go to get funding are people close to you. Your family and friends can provide a fast, bureaucracy free way of getting money for your business.
In this article we will cover four very important things that will help you determine if this form of funding is best for you. We will discuss:
1. Three benefits of getting money from family and friends.
2. Three risks of getting money from family and friends.
3. Three ways to do it right when getting investments from family and friends.
4. How to approach family and friends for funding.
Let’s go!
The Differences from Getting Money from Family & Friends
In the previous article (https://thyblackman.com/2014/07/30/business-funding-part-iii-3-basic-keys-to-getting-to-investors-and-lenders-to-consider-your-business/), we discussed what investors and lenders are looking for when they give you money. In almost all cases, professional investors are looking for how much money they are going to get back from investing. When dealing with family and friends you are dealing with a different animal altogether. In many cases, their approach to providing you with funding may be completely different from investment pros. They may be giving because of their relationship with you, because they want to see you succeed or they just do not know enough to know better.
Three Benefits of Getting Money from Family and Friends
1. Lower Return Expectations – Family and friends often do not require the same amount of cash from your business that a traditional investor will require. Because this type of investing is often relationship based not money making based, they may be investing more in their relationship with you than your business. This means that the HIGH returns investors
often require before they invest in your company may not be there with family and friends. This lets you keep more of your wealth, which is always a good thing.
2. No Ownership Stake – In almost all other investments investors give you money for a piece of ownership. Family and friends often may “invest” on a handshake and with a promise of payback in the future but have no ownership requirements. This means you do not have silent or non-silent business partners telling you how to run your business.
3. Longer Payback Periods – Family and friends are often willing to give you longer periods to pay back the funds or ‘cash out’ so to speak. This means that you have more working capital to work with. Another benefit is that you may be able to create a unique payment plan with them that works better for your business.
This does not mean that there are no risks when borrowing or getting investment dollars from family and friends.
Three Risks of Getting Money from Family and Friends
1. Relationship Strain – You risk violating the relationship with family and friends or causing strain if you do not pay back money when they expect you to. Remember, most businesses fail. If yours fails and you cannot pay it back, what impact will that have on your relationship?
2. Unclear Expectations of Payback – If you do very well, there may be expectations that you “take care of them” because they helped you get started. If you make a million and they fronted your start up cost and ask you for a large chunk of cash in the future because you “owe” them, what will you do?
3. Unclear Expectations of Ownership – Because many times these deals are not done formally you may run the risk of a lawsuit or other forms of confrontation. These may occur because of misunderstandings and wrong expectations of the investment. If they think they invested, they make think they are entitled to own a piece of the company. This may lead to lawsuits and those are never good when it comes to family.
Now that you know some risks and benefits, let’s talk briefly about how you do it right.
Three Ways to Do it Right When Receiving Funds from Family and Friends
1. Be Very Clear and Specific – Make sure that you have effectively communicated ALL THE RISKS AND POTENTIAL REWARDS they will receive by providing you with funding. Friends and family should be able to go into the deal with their eyes wide open. Even if they are willing to make it a sweet and easy deal for you, you should be willing to be equally clear and upfront with them. It may save some relationship headaches down the road.
2. Do Everything Legally – Doing it legally does not mean doing it with the same complexity and bureaucracy of a bank or professional investor. It does mean though that you should have some record of agreement that details the scope of the obligations you will have with whoever gives you the money. Again, nobody likes to go to court with a family member but this happens. Like boxing, always protect yourself even if it happens to be from family.
3. Live Up to Your Obligations – If you are very clear and specific and you are doing everything legally, then the rest is on you to live up to your obligations. If you are required to make a payout according to your agreement at a specific time, do it. Do not put your relationship on the line because you don’t want to live up to your obligations. If you do need a modification, which we often do in business, then ask. If it is accepted then redo the agreement to reflect the new terms.
So the only question that remains is how to approach family and friends to get the funding that you need?
Effectively Approaching Family and Friends
1. Understand Your Relationship – One of the very first things that you must consider is your currently relationship with your friends and family. Do they trust you? Did they give you money in the past and have you paid it back? Have you always been presenting them with the “next big thing” but never followed through? On the other side of the coin, do they recognize you as honest, with a good work ethic and great ideas? These people know you the best! If you damaged relationships in the past, it may be a good idea to repair them first before asking for investment dollars.
2. Show and Prove! – Make sure that you are fully prepared before you ask. This means having a plan in place, or at least a business model with a marketing strategy. Come with a sample loan or investment agreements in place that you can show them. Also, provide them with at least a general idea (on paper) of how you expect to pay them back. This adds credibility and seriousness to your request.
3. Discuss What You Have Put In – Make sure that you show them what you have or are willing to put in from your own pocket. If you do not have dollars that you can put in, show them the amount of time that you have put into preparing the business plan and the research behind it. This let’s them know you run the risk of losing money and time just like they do. This adds further credibility to your request.
Many, many great businesses started because family and friends saw, believed in and ultimately supported owners like you. If you are going to approach family and friends, know the benefits, know the risks, do it right and make the ask!
Part 3;
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Staff Writer; Dell Gines
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