Three Steps to Borrowing from Family or Friends

Keeping the relationship professional is the key to successful borrowing from close acquaintances.

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Charles Bodenstab likes to keep his revolving credit line at his bank as open as possible. So to meet his short-term cash requirements, Bodenstab, president ofBattery & Tire Warehouse, in St. Paul, Minn., taps sources closer to home: his children, friends, and 40 employees. He's borrowed as much as $100,000this way, offering the "commercial paper" in $10,000 bites.

Borrowing money from family or friends, of course, can be dangerous. To ensure that the agreement stays professional and that people withlimited investment experience don't get caught up in something they'll later regret, Bodenstab follows three rules:

* He gives investors letters acknowledging their investments.

* He pays out attractive interest -- say, 1% a month on a $10,000 investment -- that about equals his incremental borrowing cost. (In setting an interest rate, heconsiders not only what the cost would have been to borrow the money from other sources, but also the fact that the money keeps him from having to pay latefees to vendors.)

* He includes a clause that allows investors to get their money back at any time. "All they have to do is let me know," says Bodenstab. "We pay them instantly."

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