If you can't fund the business on your own, friends and family are a
great option. Unlike a bank, they know your character well and will probably be
more willing to take a risk on your business idea. However, because of the risk
that mixing business and friendship may sour the relationship, you'll want
to proceed carefully. Here are some guidelines to follow:
Have your attorney draw up a formal agreement with collateral specified and
all the terms spelled out, including the interest rate, payment schedule, and
what recourse the lender has if the loan is not paid.
When you pitch your business idea to your friend or family member, approach
the meeting professionally. Present your idea and your business plan just as if
you were applying for a loan at a bank.
Avoid mixing emotions with business. If a family member offers to loan you
money in exchange for having a closer relationship, accepting the offer could
create a very bad situation.