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In 2004, when Jason Maxwell was looking for money to start his payroll business, he turned to familiar faces: friends and family, including his stepfather. “It was a Lesson in humilityRecalls Maxwell, whose company MassPay Payroll Services is based in Beverly, Massachusetts, USA.
“Despite my stepfather’s loan, I insisted that we pay him Interests on the sum he lent me. I also created an amortization schedule that states how much principal and how much interest will be paid each month during the principal’s three year life loan. From the start, I’ve viewed it as a business transaction rather than a personal favor, and I know he appreciated this deal. “
Borrowing from friends and family is a Funding tactics Classic for entrepreneurs, but also full of dangers. When things go wrong, not only can you lose your shirt, but also your relationships with the people who matter most to you. Here are six tips to get it right:
1. Make a solid business plan that shows how the money will be used and how you expect the business to perform. “You must treat friends and family with the same respect you would an institutional investor,” says entrepreneur Anthony Kirlew, founder and CEO of AKA Internet Marketing, who has historically turned to family and friends funding. . “At the end of the day, they take a chance and show that they trust you.”
2. Write the terms of the agreement in writing and consider drafting an attorney’s draft or reviewing the document. “Our memories are treacherous,” says Rick Bisio, author of The Educated Franchisee and advisor to aspiring franchisees. Selective amnesia can develop within a few years, which can lead to significant family disagreement, if one person states that the money should be paid in two years and another person states that the payment should be agreed within two to five years has been.
Do that written conditions It also forces entrepreneurs to think about what they’re doing and how they’re going to deal with adversity, says Bisio.
3. Establish clear conditions for the return of the money or, in the case of a stock sale, an exit strategy. Obviously, if you want to get a loan, you need to decide what rate your lenders will get, but also when to start paying and what system.
When you give your financiers a stake in your company, you need to determine how you will compensate them for investing in stocks and how they can sell their shares to whom and on what terms if they ever choose to do so in the future.
It also makes the issues clear Profit sharing plans. For example, you could decide that the profits made after the owner’s salary is paid should be shared among the shareholders on a pro rata basis. However, if you intend to reinvest in the business the profits that remain after you have paid your salary for the next 10 years, your shareholders must know and agree.
It could be the case that they want a written commitment to do so will vote on any major investment within a certain pre-agreed threshold and on the sale of one of the company’s major assets.
4. State what should happen if your startup cannot pay the borrowed money. You can agree to pay the loan from your own resources with financial penalties. Perhaps your friends or family members are willing to take the risk of losing their investment. In both cases, giving terms helps avoid accusations later.
5. Keep communication channels open. By eliminating surprises, you avoid bad feelings in those you fund. “There have been a few times that I’ve had to postpone a payment to my stepfather until next month, and not just that Pay yourself later than expected“I informed them from the moment I knew I had a chance,” Maxwell recalls. And again I know he appreciated it. “(Maxwell ended up paying back the full loan to his stepfather in two years instead of three.)
Those who own stocks will likely insist and deserve keeping up to date on the progress of the business, including regular reviews of profit and loss reports.
6. Be creative. Your friends and family may not have enough money to fund you fully, or they may be reluctant to take the risks of the business that you are so happy to accept. That doesn’t necessarily mean they can’t help you.
According to Lindsay López, her parents put money into a savings account that she used to open a line of credit at her bank and set up Form Pilates, a gym in New York City, United States. As long as Lopez kept his payments up to date, his parents’ money stayed intact.
Remember: getting money from friends and family can be a great way to get your business off the ground or help you reach new levels of success. With a careful planningIt can be a win-win deal for everyone.