Friends are always eager to help you out when you need some help but when you ask for financial help you do need to understand that this is something completely different. There are not many things in life that are going to ruin a friendship like money. We all know it and we do not want to sacrifice friendships because of money arguments.
There are many situations in which you need financial help but when we talk about anything business related it is normal for things to become complicated. Entrepreneurs often turn to family members and friends to get money. Also, when you struggle with your business you are naturally tempted to ask for help from those that are closer to you.
Remember that when you see statistics saying that entrepreneurs “self-financed” businesses it usually means that they asked for some sort of financial support. With this in mind, whether you need money to get out of a tight jam or you want to fund a new business idea, here are some things you do want to take into account as you try to get help from friends and even family members.
Work On A Really Strong Business Plan
Similarly to when you go to a bank for a loan, it is important to prove that the money given will be returned. One of the best ways to do this is to show what you actually do with the money you get. Bank loans are never given out without business plans. Never expect friends to invest without business plans!
One of the most important things with the business plan is to set goals and show your friends how profit is going to be made. The better the business plan you present, the higher the possibility friends will feel comfortable to help you out!
Further Reading: How To Write A Business Plan from Entrepreneur.com
Ask For The Amount Of Money You Actually Need
I personally made this huge mistake when I once needed to get some cash as I was dealing with a cash flow problem. Naturally, as you ask money from family members or friends, you are tempted to ask for low amounts. This is a really bad approach as friends are much more inclined to give you more, if they have it. Also, if they do not have the money, they will tell you that this is the case and will say how much they can offer.
When referring to launching a business or even running one, remember you need 3 types of funds:
- Initial Investment – Money that is needed to launch the business and get it ready to deal with customers or money necessary to solve the problem you are faced with.
- Working Capital – Money that is necessary to maintain the business on a losing phase until the break-even point is reached. In the event of financial difficulties, this is the money you need to get the business back on track. After all, getting the initial funds to pay debts is not enough to solve problems that led to not having enough funds in the first place.
- Home Capital – This is money you need to be able to personally survive. You cannot put everything in the business since you have your very own bills and you need food and shelter. Specialists recommend having a reserve of 6 months. Even if this is not possible, you should still aim for a couple of months.
Further Reading: How Much Money Do You Need To Start A Business? – from Intuit.com
Draft Payment Plans
You cannot ask for money if you do not tell your friends how they are going to get it back. You need to draft a good plan so that everyone is paid back. Preferably, you want to offer interest since we are talking about a business and not a personal problem that appears because of an emergency, like an injury.
When you launch a new business it is a good rule of thumb to have the very first payment done around 6 months after the official launch. Such a thing should be discussed. There is a strong chance you will not be able to start repaying the money fast so do offer interest and work on figuring out exactly how repayment happens.
When you draft your payment plan try to think about everything that could happen. For instance, if you cannot make the payment in one month, what will you do? If these things are discussed ahead of time it is much easier to deal with any difficulty.
The last thing that should be said about the payment plan is that it is always preferred to put everything in writing. This avoids discussions and keeps you on track.
Further Reading: How To Set Up A Debt Repayment Plan In 6 Easy Steps – from TheBalance.com
Expect A Business Relationship
In many cases a huge problem appears because those that borrow money for a business from friends do not expect those friends to want to be involved in the business. No matter who contributes to your business, there is a possibility that views and opinions are going to be expressed. You want to talk about these things as you ask for money. Do expect family members and friends to keep asking questions, offer completely unsolicited advice and randomly check in.
All this should not be taken personally. It is normal since your friends are not really investing in you or giving you a personal loan. They are making an investment in a business. Even if they do not get money back with an interest, they still want to be sure they get their money.
Trust is really important in everything. This includes business and relationships. You do want to show your friends that they can trust you. In regards to business, this is done by proving you are prepared and professional. Doing this just by talking about the business is close to impossible. Proof is always a lot better! Do be sure you have documents at hand and always be ready to answer any questions that might appear.