My business partner and I started our firm with a loan from my mother-in-law and older brother. The former gave us $7,500 while the latter chipped in $5,000. Despite starting without a client or dime to our names, we pledged to do our best to repay both with interest by the end of the first year.
After three brutal months of smiling-and-dialing, we hit pay dirt, the business took off and we repaid both loans, with interest.
Fortune favored us. But, there's no certainty to either success or possessing the wherewithal to repay a start-up loan. Tack on the additional stress of having asked family or friends to open their wallets, and one could damage lifelong relationships.
Happily, there are guidelines for borrowing money from family and friends. And, I turned to a true expert in the field, Bruce Cacho-Negrete, vice president, investments of The Starner Group of Raymond James for five quick tips you can follow:
1.) Be realistic with investors.
Borrowing money from other people has strings that can sometimes create difficult situations. If you're borrowing from family (or friends), you should say "...Only loan me this money if you're comfortable with not getting it back."
2.) Be realistic about how much you need.
Whether you're borrowing from family or even requesting a bank loan, you'll want to take on a manageable amount of debt for your business. Think about what you can realistically pay back.
3.) Create clear terms for paying back loans.
To make sure you're not creating an awkward situation if you're not able to pay back friends or family, create some sort of agreement. There are terms like AFR (Applicable Federal Rate) that provide guidelines that are helpful in creating a loan between two related parties. Creating those clear terms can help with setting expectations.
4.) Break the bad news honestly and swiftly.
If you need to report bad news, do it as soon as possible and as honestly as possible. I don't believe in the word "never" when it comes to debt repayment, especially to family. I've seen people repay loans 20 years after a business failing.
I think honest people have a moral compass that makes them want to "balance the books" eventually. Just because you've hit hard times now doesn't mean things will always be bleak. Be honest and even comfortable with telling family or friends the money is gone. But keep a mental ledger and repay people as soon as you can. It's good business to do the right thing.
5.) Don't be afraid to go back and ask for more.
Assuming they've established a track record of repayment and trustworthiness, I've seen many entrepreneurs go back time and time again to ask for additional funding. Begin the conversation by saying, "Remember the last time you gave me a loan and I used it to successfully achieve XYZ? Well, another opportunity has arisen and I could use your help again."
Happily, I've never had to go back to the well to ask family or friends for a cash advance. But, if I did, I'd most certainly follow one or more of Cacho-Negrete's tips. With something as delicate as this, you need all the advice you can get.