In our first post in the series, we looked at why you should give serious consideration to bankrolling your startup from your own personal funds. It’s an option that’s often overlooked, but obviously not for everyone. This time, we’ll talk about your next easiest option — have a little help from your friends.
Who are they?
Broadly, we’re talking about your personal network — acquaintances close and not-so-close. Overall, we could refer to this as “family, friends and fools.” (A “fool” in this case isn’t at all witless, they’re just willing to invest on instinct and trust). Aside from being a phone call away, all of these sources have a few things in common that make them strong possibilities for obtaining your startup capital.
Confidence
Banks, lenders and other professional funding sources are in the business of making sure they get their money back with interest. To give them confidence, they may ask for credit scores, collateral and a concrete business plan. But with your personal network, lender confidence could come down to leveraging a single asset — your reputation.
Personal Investment
When a bank writes a loan, it’s all business. Money out to get money coming in. But when a friend or family member gives you a hand up, they’ll often measure their return on investment in your personal success. Business advice and emotional support just might be an unspoken bonus in signing a loan with them. In short, an investor that trusts and believes in you as a person is valuable beyond the money they lend.
Mutual Gain
It’s important to remember that a loan creates opportunities for both sides. If you’re starting a business you believe in, giving your personal network a chance to invest gives them a chance to share in the rewards. Whether they’re earning a fixed-percentage interest, a portion of profits or a piece of your business, funding through a friend can provide considerable benefits for all parties involved.
Considerations
As with any funding option, this route is not without precautions. Before engaging in a loan with a personal connection, you’ll want to make sure of the following:
+ You’re confident in the business — your lender is taking your judgment as collateral; don’t give them a fake.
+ The acquaintance can truly afford the loan — don’t let your family risk their own livelihood to help.
+ A legal agreement should be put in place — careful verbiage will give both parties the ability to make the agreement as stringent or lax as they’d like, but it’s imperative to document your agreement — not just for legal and tax purposes, but to preserve your valuable friendship.
If it’s done right, a loan from “family, friends or fools” might be the best option at your disposal. It’s simple, supportive and in the end — it just might make you both rich.
