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.

Asking Friends and Family for Financial Support

The biggest hurdle stopping many entrepreneurs from getting private financing is simply the fear of asking. You can overcome this fear with a combination of careful preparation and choosing a time and place that makes you and your prospective lender or investor comfortable.

Try for a "kitchen table pitch," in which you get the other person excited about your business idea in person. Suggest a loan or investment opportunity and promise to follow up with written materials. Then be ready with your business plan and a detailed loan or investment proposal.

Documenting the Loan or Investment

Once someone has agreed to participate in financing your business, it's crucial to get the agreement in writing. In the case of a loan, you and your lender would draw up a promissory note detailing the amount you'll owe, your repayment schedule, and penalties if you fail to make a payment. In the case of an equity investment (which assumes that you've set up a

For more information on every aspect of private financing -- from making your pitch to preparing the appropriate paperwork to maintaining good relations with your lender or investor over the life of your business -- see Investors in Your Backyard: How to Raise Business Capital From the People You Know, by Asheesh Advani, President and CEO of CircleLending.

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