Borrowing money from family and friends has its advantages. In most cases, there will be no commissions or interests attached. However, the dangerous part is that these informal transactions do not have the assurance that money will be returned. Many times, relationships are broken as a result of these issues. In this article, we want to give you a series of practical tips and aspects you should keep in mind when borrowing money from family and friends.

What Should I Consider When Lending Money to Family and Friends?

Be it a stranger, a family member, or a friend, there are several things you should keep in mind when lending money. First, you must investigate your future debtor. It is important to know why the person asking you for money needs it. Then, you must ensure they will return the money. Otherwise, it makes no sense for you to give them a loan. Now, let’s see some practical tips you need to know whenever you want business funding from your family.

Study the Possibilities

Before asking, analyze how much you need, what return conditions you will likely have and what are the risks of the operation. If you plan to return the money with the benefits, you have to accommodate the terms to the cash flows. For that, you must make a repayment schedule and the corresponding cash forecast, just like if you were facing a bank loan. If you cannot return the money, the relationship may deteriorate. If the money comes from your spouse or close friends, it can cause a significant personal problem, which will also affect your mentality.

Choose the Right Person

Entrepreneur pitching business proposal to his mother on laptop
Entrepreneur pitching business proposal to his mother on laptop

Not all people in your social circle are suitable to lend you money. Personal ties influence conditions and risks. For example, asking your grandmother for money is not the same as asking your brother-in-law. The less consanguineous relationship, the closer we get to the figure of the business angel. Therefore, you should arise more formality in front of them.

If the amount you need is high, consider looking for several sources. A large amount of financing from one close relative carries the risk of putting all your eggs in one basket. If the relationship goes wrong, the sense of trust with your relative will be broken.

Try to Convince, Not Sell

In principle, family and friends are always predisposed to help. But you have to put yourself in their place. They often risk their money without charging benefits. Therefore, there are cases in which you will have to make a formal presentation, etc. in which it will be convincing to ask for the money. This depends on the type of relationship you have. But if you make them see that there is a serious and trustworthy business project forward, you will give them more peace of mind.

You must clearly explain what the conditions are and what economic risks the operation implies. This is especially true if your family members are not entrepreneurs. A misunderstood point can become a source of chaotic discussion later. Finally, it is possible that whoever lends you the money will feel the right to comment on the progress of your business. In that case, act with common sense. It costs you nothing to keep him or her informed.

Summon the Contracting Party

There is no model of a family loan contract, but lawyers make a suit tailored to the conditions agreed by the parties. You must detail who is involved, that the borrower needs the money, and the lender wants to lend it. You should also indicate the amount, conditions, terms of delivery, and return. However, the intervention of a notary is not essential.

To keep business and emotions separate, consider applying for a loan through a private service (P2P). These type of companies do not give loans. Instead, they act as intermediaries between you and the one who decides to lend you the money. You and your lender agree to the repayment terms, and the P2P company handles your payments in exchange for a fee. This eliminates the hassle of making monthly payments and provides confidence to your lender. This way, he or she can see how their loan is returned without having to walk behind you.

The delivery of the money and the returns made must be documented. At the end of the loan, it would not be necessary to do any paperwork. But it does not hurt to do so. When making the last payment, you have to record the activity in writing so that the lending parties can no longer claim anything.

Consider the Benefits as an Expense

Entrepreneur sorting through cash loan
Entrepreneur sorting through cash loan

Take this for example. Imagine that your father lends you $12,000 to start your business. You agree to repay the loan monthly. Imagine that you pay $1,000 in loans and $100 of interest every month. When making the declaration, you have to count those $100 as a financial expense of your business.

Final Thoughts

80-85% of small business in the US that request financing from credit institutions find serious problems. Between 10 and 15% do not get it. Therefore, family assistance is the order of the day. Instead of asking for as much as you can, consider how much you need to reach a certain point in your business plan. For example, if you need cash to increase your inventory, evaluate the cost of the merchandise and ask for a sum that helps you stay for at least the first 3 months.

When you can prove your ability to pay after returning the initial loan, you will have a good reputation to ask for more money if you need it. Always remember to show the level of progress of your business even if you have made some initial mistakes. The main advantage of the loan made by relatives is that the two parties can agree on the conditions with greater freedom than when the money is requested from a bank. Therefore, you should consider some essential aspects, such as terms and loan repayment.

What are your thoughts on obtaining funding from family or friends? Let us know down in the comments.

This article originally published on GREY Journal.