How To Get Financing From Friends And Family

Are you looking for a quick way to get $5-10,000 for your business?

You have a small business or a great idea for one. You feel confident that this will fly and make money. You have a rudimentary business plan but no money. Maybe you have bad credit and you need financing. I have been there several times. I found that the easiest way to get financing for a small business is regular people. Like friends and acquaintances.

The risk is losing friendship and having your family turn against you. Money controls most things in life. But – if you can’t get financing through a bank or other normal sources – this is the way to go. If you are willing to take that risk.

Why would regular people lend you money they have worked hard for? Mostly because you are you and they like you. NOT your business idea. So rule number one is to approach only people that you know like and respect you. Borrowing personal money is different from having to prove your self-worth. It’s mostly based on personal liking and trust. People like to help people they like. And they will. Many people also feel if they don’t lend you money you won’t like them any more. This is a real test of friendship and it can backfire.

Secondary is the obvious desire to make money. Most people are willing to take some risk to get a return on their investment. Pending on the wealth of the person – a loan for $5-10,000 is not a huge thing. Any more than that – and you better have a great plan. If your business plan is highly capitalized – you need to re-think this approach.

Before you approach your targets – prepare a little bit. Try to establish if they are ABLE to lend you the amount you ask for. It’s a complete waste of time to ask for $5,000 if the family is scraping bottom every month. Don’t do it. But if you know that the famil is strong financially – go for it.

Your initial approach should be in the form of a letter. This is what I have done and it works. Write an intriguing but honest letter. “We have only known eachother for a few years, and I thought you’d be interested in a project I have worked on for a while.”

Then give them a very brief outline of the business: “Basically, I have discovered that many engineers in our states have very poorly performing web sites. I know I can help these company grow their business by creating compelling web sites that will sell their services.”

Then you go for it: “What I am proposing to you is to help me market this concet. To do this successfully I need some funding for a direct-mail marketing campaign. I am asking for $7,250 to spend as follows:……”

Then you must give them a carrot – a potential return on their investment. There are a couple of ways this can be done. I have used a percentage of gross revenues with success. This means that they get let’s say 5% of gross revenues for a few years, and then the loan gets paid back. You have to estimate what that revenue can be before you settle on a percentage. So if you figure out you could make $100,000 the first year, and you are asking for $5,000 – a 2-3% of revenues is not out of line. Remember – you are NOT going to ask for a bank-rate loan. If you can get a bank loan – get one. If you need financing and you have bad credit – IT WILL COST YOU. And is should.

The bottom line is: They will lend you the money first because they like you. Because you are part of their group. They trust you. NOT because your business idea is so great. I have found that most people I have borrowed from don’t even understand what I do.

Then you pay them as agreed – and you can go back many times to your own private bank for business financing.