Starting a company takes money; there’s no way around that fact of life. But the amount of start up capital will differ based on what type of business you own.
Internet marketing simply requires a computer and wireless connection but real estate investors generally need thousands of dollars to make that first investment. Unless you’ve won the lottery or cashed out your 401K (which is NOT recommended, by the way) where will you get those funds?
The natural thing to do is to ask your family and friends to invest in your business. After all, they know you best and will know your passion for your business.
But we’ve all heard the horror stories about family and friends lending money and it never gets paid back. Or the money is used for something different than what the lender expected. Here are 5 tips to borrowing money from family and friends while keeping those relationships intact:
1. Choose a Strategy. Do you want to ask 100 people for $1,000 each or 20 people for $5,000 each? Keep in mind that the more money you ask for, the more reluctance you’ll encounter. But the smaller the amount, the more people you’ll have to ask (although there is less pressure when asking for a smaller amount.)
2. Choose an Investment Type. Will these be gifts or loans? Will you pay back the loans, offer dividends, or equity in the company in return for the investment? Make it legal with the correct paperwork for your state and list out the exact conditions of each person’s investment.
3. Write down your plans. Traditional banks and financial institutions often want to see a traditional business plan. Most family members won’t want to read a full business plan but they need to know you’re serious with your plans and will want to know how you plan to spend their money. Write your plans in a short, easy to read 10-12 page document and encourage them to ask questions.
4. Be professional. Sure, these are your friends but this is business. Keep your business communications professional in tone and appearance and save the informal stuff for after business hours.
5. Keep investors up to date. Even if things aren’t going according to your plans, touch base with your investors either by phone, email, or meetings to give updates at least once per month. This will help solidify your credibility and honesty as a business person and if things do go well, you might be able to ask for more money from this group in the future.
For more information, read the full article here.
