Friends and family remain the best shot that many small business owners have to raise outside money to launch a business. But with loved ones, you’ve to structure any financing for your small business very carefully – and understand that the future of the relationship may ride on the success of your new venture.
So what’s the protocol for approaching an informal investor such as a friend, mentor, or even a family member? How do you work with them once you’ve secured an investment? Here are steps to take when seeking small business funding from friends and family:
Come Up With a Plan
Be open with your plans, showing where their money will be going and how you plan on returning that investment. You might suggest, for example, no payments for the first year; interest-only payments for the next two years; and, after that, an amortized schedule to pay back interest and principle over the next two to five years.
Think About What You Need Before Bringing Up Money
Instead of asking for the maximum, consider what you need to get you to a certain point in your business plan. Have an amount in mind, repayment terms, and any other conditions you feel are needed. But typically only 10% to 20% percent people asked will contribute. So if you want to raise, say, $5,000 at $100 per backer, you’ll need to woo 50 people.
Write Down your Pitch
Even though your friends and family are professional investors, they probably don’t want to read a 50-page business plan. More likely, they’ll prefer to sit down with you over coffee and hear you explain your idea. So you need to arrange a business meeting, or invite them to lunch and tell them you want to discuss a business opportunity with them.
Communicate the Risks, and Write Down the Agreement
If you are asking for money for a business purpose, make it a business transaction. Even thought you may know your lender or investor well, remember that this is a business agreement. Write down an agreement which should detail your business plan, how the funds will be used, how progress will be measured, and how repayment will be made. Also think hard about the consequences of a possible startup failure and the loss of their funding.