Borrowing Money from Family and Friends to Start a Business

As an entrepreneur, it is often hard to secure traditional sources of financing to get a new operation off the ground. Most entrepreneurs who are passionate about their business idea usually opt to go to friends and family members in a bid to raise the needed cash.

It is so much easier to raise funds to fund a start up from people who do not have the same requirements as traditional lenders especially when it comes to repayment. You can raise the money you need to get your business off the ground without the pressure of making repayments before the operation is barely profitable.

Read on to find out some useful tips on how to make borrowing from friends and family to fund a start up work for you.

Use Peer to Peer Service

Although some family members and friends may be willing to lend you their money without the expectation of getting it back soon, most will want their money back sooner rather than later. The main problem with such loans is the lack of a management plan. A peer-to-peer lender comes in to formalize some aspects of the loan agreement, acting as an intermediary. They manage repayment aspects on your behalf for a fee. This ensures that lenders will get their money back without having to chase you down.

Choose Carefully

Although you might be tempted to approach just about anyone close to you, it is best to choose lenders wisely. Every business endeavor comes with associated risks and rewards. Start ups usually come with a high risk of failure. Since you are essentially taking advantage of your relationships, it is vital that you choose people who understand exactly what they are getting into. This reduces the chances of falling out with friends and family members in case the business fails.

Conduct your Due Diligence

Before you approach potential lenders, be sure to conduct your due diligence. Research the market and come up with a viable business plan; even a simple one will do. The main goal is to demonstrate how you plan on using the borrowed money and generate enough to make repayments.

Loan or Equity

Another important factor to consider is whether you want a loan or to give out a share of the business. Loans require repayment, while a share of the business means that you share responsibilities and rewards. Think carefully before making a decision.