Raising Capital from Friends and Family

Posted on August 5, 2018 in Money & Finance

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As access to credit gets tighter in the “new economy,” many business owners may look to friends and family to help them get through the lean times. Friends and family are a tried-and-true source of funds.

That said, business deals with friends and family can be enormously counterintuitive. Because you’re dealing with your college roommate Patrice or your Aunt Louise, entrepreneurs have a natural tendency to want to handle these situations on a handshake, in the same kind of casual rhythm as you’d ask them out to lunch.

Don’t.

Once you have a business proposition on the table, let the pendulum swing to the opposite extreme.  Be overly vigilant about documenting the deal, clarifying the interest and payback terms, and adhering to your agreement. As I mention in my article, “Raising Capital from Friends and Family,” failing to put your loan agreement in writing can lead to a variety of tax and legal complications. For example, your family member can’t claim the appropriate deductions for the loan.

Underlying it all, you have a very special asset at risk: trust. Because of the personal relationship, it’s not “just business,” the way it is with, say, a bank. Make sure you keep your benefactor apprised of how you’re using the money. Be proactive if you run into problems meeting the payment terms. Open and honest communication–just as you would use on the personal front–will go a long way to keeping all facets of your relationship strong and vibrant.

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