Creativity and outside-the-box thinking are the two cornerstones of success in business. Profitable tech companies, such as Apple or Microsoft built their position on a highly competitive market thanks to innovative and user-friendly products. Other businesses, such as Amazon or Trader Joe’s rose above the crowd with their excellent customer service. And then there are those that looked at simple things from a different perspective and developed surprising alternatives to well known products or services, including Netflix with its take on movie streaming or Tesla with its involvement in the development and promotion of electric vehicles.
No matter what business model you decide to follow, you will need corporate capital to get started. You may apply for a business loan, try crowdfunding or dip into your personal savings, but you can also ask your family and friends to invest in your venture. If you lean towards the latter option and you don’t want your relationship to suffer, there are 5 things you will have to consider before you ask your loved ones to lend you the money to fund your business. Read on to find out what they are.
Before you reach out to your family and friends to fund your business, you need to crunch the numbers. Decide whether you are looking for one time business loan, or maybe you would like to offer them a long-term investment opportunity. After that, calculate how much money you will need.
Be very diligent and consider all possible scenarios, as many business expenses lie in the details. Write down how much money you will need for the inventory, office rent, supplies and advertising. Knowing that, you will be able to assess who would be the ideal person that you could approach about the subject. Generally, it would be best if you could choose someone with business background, as they will know exactly what you are going through.
A thorough business plan is the key to getting your message across. Your business plan should be clear, well-organised and structured. Do remember that you most probably won’t be dealing with professional bankers; therefore try your best to refrain from business jargon and preferably put everything in simpler terms. Doing that will make your addressees feel more comfortable and, consequently, less likely to reject your request. Prepare copies of your business plan for your potential financiers and give them enough time to go through it at their own pace.
Although it maybe easier to convince your friends to help you fund your business, than convincing a total stranger, you still need to approach the subject with the utmost professionalism.
Do not take your personal relations for granted. Instead, prepare a captivating pitch where you will describe your business model and ethics, as well as the risks that come together with your line of work. Do not hesitate to present your current successes, but also be honest about the failures or setbacks, so that your addressees can get the full picture of the state of your business. You will have to prepare yourself for a rejection, but when it happens assure your friends and family members that you do not take it personally.
Your friends and family members may all have different risk appetite levels. Be up front about the risks connected with the investment and present your financiers with damage control plan just in case the things go south. Also, make sure that your prospective investors understand the risks to the fullest. You need to remember that your financiers are doing you a favour by funding your business with their personal savings, so be mindful, respectful and sensitive.
As soon as you reach the decision with your future investors, put all agreements and provisions in writing. A written contract will protect you and your counterparts from possible complications or misunderstandings. The agreement should be as detailed as possible in order to assure your family members and friends that you take this matter seriously, know your rights, respect your investors and appreciate their help. Such legal document should include full amount of money borrowed, interest rate, repayment timelines and reporting. Preferably, it should also state how are you going to spend the money and outline investors’ involvement in company operations.
If you have decided to ask your friends and family to finance your business, do follow our 5-step protocol for approaching your future financiers with respect and professionalism they deserve.
About the author
Alana Downer is a financial expert and a content editor from Learn to Trade, an educational resource for investors and traders. Deeply interested in all things revenue-related, and often shares her ideas online, writing about creating a profitable business, investing, trading, or establishing a passive income.