In many ways, seeking money from a friend or family member is even more difficult than asking a bank or a credit union for a loan--after all, you will see them again, and failing to honor financial commitments can sour your personal relationships for years to come.
For most entrepreneurs starting out, the only access to money we have is from a family member or a friend. How do you successfully navigate the transaction to ensure that both you and your friend or family member comes away satisfied? Here are some tips to make the deal a success:
1. Prove that you can handle the responsibility.
If you've asked a friend or family member for money before and have failed to pay them back, you're less likely to obtain a loan the next time around. If you've proven yourself reliable in the past, however, you're more likely to convince your prospective lender that you can handle the responsibility. Have you borrowed money from this person before and successfully paid them back? Have you proven yourself reliable in other ways by house-sitting for them or by taking care of their kids or pets when they were away? Put their mind at ease before entering into any kind of loan agreement and you're more likely to get the terms you seek.
2. Put the terms in writing and honor them.
A wealth of free loan agreement forms are available online. Convey the seriousness of your request by putting it in writing and making the terms of the loan explicit. Define how much you are asking for, when repayment will begin, how long repayment will last, what interest rate you will pay (if any), and under what circumstances you might be granted an extension or forbearance. The goal is for you and your friend or family member to put all loan agreement terms in writing so that no unpleasant surprises derail the transaction.
3. Reciprocate when you can.
Remember, your friend or family member has done you a favor--presumably because a bank, credit union, or other lender would not. Reward that kindness by showing your appreciation when you can. Offer them a ride to the airport when they need one, take them a home-cooked meal, or give them a night off with an offer to babysit. Little acts of kindness can remind your friend or family member that they did the right thing in loaning you the money and that you appreciate the favor.
4. Keep track of the debt and offer regular updates.
Track your debt and repayments. Depending on the terms of the loan, monthly or quarterly updates might be appropriate. Summarize how much you borrowed, how much you've repaid in principal and interest, and how long it will be until you pay the debt off. This demonstrates your seriousness and commitment to repaying your debt and allows you to resolve any accounting discrepancies in a timely way.
5. Give thanks when the terms are complete.
Did you use the money to launch your own business? Pay for a medical expense? Further your education? If so, remember the friend or family member who helped make it possible by inviting them to your opening day, your get well celebration, or your graduation--let them see how you spent the money and that it was a good investment.