How to handle business loans from family
Anson Liang, the founder of TrustLeaf, gives her views on how a small businesses and startups can raise money from family and friends.
As a serial entrepreneur, she has your personal experience of raising money from family and friends.
In early 2011, she created an online business with two of my friends. Over the next year, while designing their product, they basically ran through their personal savings and maxed out credit cards. They didn't qualify for any bank loans at the time.
But Liang avoided asking friends and family for loans because then her co-founders would also have to raise money from their friends and family, just for it to make sense. It was much easier to avoid those awkward conversations and just keep depleting my savings account.
Fast-forward a year: their product was ready to go and ready to be promoted. Except they'd run out of money and couldn't pay the rent, much less invest in the type of promotion that the product needed in order to become popular. By then, it was too late to begin a real funding campaign, and their product basically died while they were busy searching for regular jobs.
"The worst part about this was that we were all software engineers with lots of friends and colleagues at Google, Apple, Facebook, etc, who had plenty of money they could have loaned us," she said.
"Two of my friends offered to loan me money, but they only wanted to loan the money to me directly, not to my co-founders, whom they didn't know. In the end, I decided it wasn't worth the stress, time, and risk of ruining the friendships. It was extremely stressful, and that's how I knew there had to be a better way."
So, what advice does she have for aspiring entrepreneurs when it comes to getting nearest and dearest to invest in you?
"Preparation and communication are 90 per cent of the work when it comes to friends and family funding. The follow-through is surprisingly easy if you've done your homework. Be careful, though; it can be a total nightmare if you avoid the tough questions at the beginning."
She offers four steps.
No 1: Always provide a business plan, even if it's just a simple one. It looks unprofessional to not have a business plan. Just as important, giving them a business plan means they have a solid idea what their money will be used for. This is better emotionally, but also makes it more likely they will offer higher amounts.
No. 2: Make the terms of the agreement crystal clear in writing. If your business hits the jackpot, the last thing you want is someone thinking that they are part owners and deserve a share of the profits directly. If you just want a loan on which you will pay interest, that has to be clear. With a well-written agreement, you protect yourself as much as you protect their investment.
No. 3: Offer a fair interest rate. If the worst happens and you need more time to pay your friends and family back, they are much less likely to freak out if they know that they are earning a good interest rate in the meantime, and that you genuinely want to pay it back in full.
No. 4: Ten loans from 10 friends and family are better than one big loan. It's better if one person doesn't put all their eggs in your basket, so you should prefer to owe 10 people $2,000 each than 1 person $20,000, especially when they're a relative or friend. And in order to manage all of that, an online platform like TrustLeaf is pretty much the only way to go.
