Asking for money from family or friends is never easy, but it's sometimes necessary when you're trying to start a new small business. Following some basic rules can make it less difficult or awkward, not only for yourself but for those you're asking. Never take personal relationships for granted or expect someone to give or lend you cash, even if—at least according to your standards—they seem to have money to burn.
Rule #1: Family and Friends Are Not Banks So Don't Treat Them Like One
It's never a good idea to catch someone off guard when you're asking him for something, especially money. Bankers and investors expect people to request money from them, but family and friends do not. Show your family and friends the same courtesies and exhibit the same forethought as you would with a loan officer.
Put the shoe on the other foot. If you were asked to invest in something, would you want detailed information and some time to think it over? Your family and friends deserve the same.
Give the person you're planning to ask some to think about whether or not he's interested—before you ask. You might want to set up a business meeting or invite him to lunch and tell him that you want to discuss a business opportunity with him. And make sure you pay for lunch!
Rule #2: Think About What You Need Before You Bring Up Money
Be sure you've thoroughly thought out and identified what you want to ask for before you approach someone. Have an amount in mind and be ready to propose repayment terms and any other conditions you feel are necessary.
You should also think about what's not acceptable and be prepared to negotiate or politely decline an offer that doesn't meet your business goals. Steer clear of any terms that might sour a personal relationship.
Rule #3: Prepare a Sales Presentation
If you have a business plan—and you should before you ask anyone for money—present it to the individual before the meeting takes place. The same goes for promotional literature or financial reports.
Don't expect your potential investor to be excited about offering money without being well-informed on the idea first, just because he's a family member or friend. Prepare and deliver a marketing strategy or sales pitch just as you would be required to do for any other investor or lending institution.
Rule #4: Put Everything in Writing
Few things can destroy an otherwise good relationship faster than a misunderstanding over money. If you're asking for funding for a business purpose, make it a business transaction. Even if the lender says that formalizing the loan or investment capital isn't necessary, it is—not only to protect the person who's giving you money but to protect yourself and your business as well.
Insist that the terms of borrowing or investing, as well as any repayment terms, are clearly spelled out in a contract or agreement. Make sure all parties involved in the transaction sign it before you accept the cash.
Rule #5: Follow Up on Your Progress and Setbacks
Don't wait for your benefactor to ask how things are going. Keep him updated and informed. He'll be less anxious about how his money is being used and that's a good thing—particularly when you share a personal relationship.
A Final Precaution
Don't use money given or lent to you for any purpose other than what was agreed upon. Above all, stick to the repayment terms and anything else that's been agreed to in writing. If you can't meet a loan payment due date, let the lender know as far in advance as possible. He might be counting on your payment to meet his own obligations.