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Raising Money From Family and Friends

Use the same type of financing that helped Wal-Mart, Subway, and millions of other U.S. businesses get their start.

Money from relatives and friends can supplement the business financing you're receiving from other sources -- or even fill a critical gap in starting up your business. And, the financing terms for loans or investments from your relatives and friends are often more affordable and flexible than what you would get from a bank or professional investor.

Getting friends and family involved in business financing is not uncommon -- nearly one in ten Americans reports a loan outstanding to a relative or friend. And, although lenders usually get involved to help you out, they can benefit from the deal as well. For example, the interest you pay will probably be higher than what they would receive from other short-term investments such as CDs or money market funds. And you'll still be paying less than you would on your credit card!

Protecting Everyone’s Interests

Of course, there are potential pitfalls and hassles that come with mixing money and relationships. Family members may feel that you "owe them one." Or, you may not like having some lenders or investors watching your every move and criticizing your new car or family vacation. And, not every lender will be sympathetic as you try to explain to your need to reschedule or skip a payment.

For the most part, these are issues that can and should be dealt with in advance. Make the arrangement as professional as possible. That way, your private lender or investor will treat this as a business, not a personal arrangement. You can, for example, offer collateral to secure your friend or family member's loan. And, you should agree on clear and definite terms for any loan, including payment dates, interest rate, and penalties, if any. If your friends or family make equity investments, you might agree to give them a right to share the proceeds from the business’s assets if it’s sold.