Let’s get straight to the point: borrowing money from close family or friends should not be your first port of call if you are looking for funding. Mixing business with your personal life can be a potentially lethal recipe for fall outs - particularly if you encounter problems with paying back the loan.
However, this might be an unavoidable scenario and you may have no choice but to ask your nearest and dearest for a quick injection of capital. But, you need to treat this with an extra level of care. Particularly, as these are the people who know you best. This means they will know your weaknesses as well as your strengths. This level of intimacy is something you need to get over. This person might be someone you have shared history with, but this arrangement should be strictly business. That means you need to…
From the outset, you need to make it clear exactly how much money you need to borrow. Then you need to address the next issue: how will the money be used? A family member or good friend will rightly want to know that their cash is going to good use. And finally, when will they be paid back? Your financer should be given a good idea of when they can expect repayment for their kind investment. Don’t leave them in any doubt that you not only intend to pay them back, but you will do it in a reasonable time frame.
Of course, whilst a plan is crucial, you would also be wise to consider how many people you want to be financing your venture. You should consider if it’s wise to be asking one single individual for a large sum of money. Why not ‘spread the love’ by getting a few of your inner circle to invest in your venture. That way, if things don’t go according to plan, you will have only lost them a small amount of money. Again, it’s up to you to decide what is the best course of action.
The best way to put yourselves at ease is by having this all written down. On this document should be the amount that the lender has agreed to finance, as well as when this will all be repaid. This will make it very clear that this is a formal agreement between two parties and not a gift. Both parties (or multiple ones depending on how many people are involved) will then begin to take each other much more seriously. Clear parameters will have been created and both yourself and your lender will have clear expectations of each other. Plus, it just looks far more professional.
The advantage of receiving a loan from someone you know well is that regular communication should be relatively easy. If you know someone well, you will probably talk to them quite often anyway. Take advantage of the informal relationship that you have by updating them with your progress whenever you can. This will keep them happy in the knowledge that you are doing well. Or alternatively, if there are any problems, you can be honest with them. And if this is something you can’t control, they should be understanding. If they care about you, they will help you overcome most obstacles that you might be encountering.