Asking for help is one thing; asking for financial help is another beast all its own. Yet many small businesses and startups turn to family and friends to help fund their company.
Many entrepreneurs bootstrap or self-finance their business. But that doesn’t mean every founder saves up their own money, opens a line of credit, or seeks a bank loan. For some, it makes sense to ask friends and family for financial support.
If you want your loved ones to buy into the business, you need to get over the awkward feelings of asking for help and convince them that you’re serious about this business and have a plan to make it successful, Scarda says.
To do so, you’ll want to follow these tips to ask friends and family for startup cash.
1. Have a solid business plan
Whether you’re asking your best friend or going to the Bank of Mom and Dad, you need to treat the discussion like you would with a banker. You wouldn’t get a bank loan without a business plan, and you shouldn’t expect your family and friends to invest in your company without one either. Your business plan should include your financials, milestones, and metrics that make it clear how you plan to make your venture profitable.
Need a little help creating a solid business plan? No problem. Check out these business plan samples, or try LivePlan, our business planning software.
2. Ask for enough money
When you’re asking friends and family to part with their hard-earned cash, your instinct is probably to ask for as little as possible, but Scarda says this is the wrong approach. If you don’t have enough money to start the business, it won’t succeed. Scarda says you need to consider three pools of money:
- Initial investment: Money needed to get the business ready for customers, also called startup costs.
- Working capital: Money needed to keep the business going until you hit your break-even point.
- Home capital: Money needed to personally survive while the business is launched. You need money to pay your own bills—don’t forget this piece! A six-month reserve is a good rule of thumb, Scarda says.
3. Make a payment plan
How do you plan to repay your family of investors? If you’re not planning to offer equity in your company in exchange for cash (a typical scenario with angel investors and venture capitalists), you’ll need to figure out a plan to pay everyone back, with interest, just like a business loan. Scarda suggests scheduling the first payment six months after the business opens.
The plan should also include “what ifs”: What if you can’t make a payment one month? What’s the plan then? By having these issues worked out ahead of time, you’ll save problems down the road. Put it all in writing, too. A legal document is best.
4. Expect investors to take an active role
The friends members and family that invest in your business may want a say in how things are done. It’s something you should discuss before raising money from people you’re close to. Investors, even if they are your parents, will want to protect their investment. Expect them to check in, ask questions about the business, and give you unsolicited advice. Don’t take it personally, Scarda says—it’s a business relationship, and you should treat it as such.
Above all else, you want to show your family that you are professional and prepared. Show them you’re ready for the big time by having all the necessary documents and by answering any questions they have. Practice your pitch beforehand, and think through your answers to any potential objections.
Tips when borrowing from friends and family
If you’re dead set on asking a friend or family member to help fund your business here are a few best practices to keep in mind.
1. Figure out who to ask
For starters, you’ll need to find someone with the financial means to help you out. Do a mental survey of your friends and family and make a small list of people who might be willing to part with some money. Has anyone ever offered to help out? Ask them first.
2. Make it easy for the lender to say no
You don’t want to damage your relationship, so make sure the person you’re asking feels very comfortable saying no to you. Make it clear that there will be no hard feelings.
3. Be honest
If your peer is willing to lend you money, honesty is your best policy. It could take some time to pay back this loan, and you should be honest about your progress until the last dime is paid off, Jacobi says. As a show off good faith, be willing to share your financials and business plan with your potential lender too.
4. Ask for what you really need
Asking for too little makes your loan riskier to the lender. To make this a successful transaction, borrow enough money to solve your problem—otherwise it’s not worth it.
“This is not a time when getting a little is better than getting it all,” Jacobi says. “You’ll spend your time chasing the rest of the money you need instead of getting back to earning for payback.”
5. Make a plan to pay it back
Come up with clear terms to pay back the loan. Whether you plan to pay it back in installments or in one or two lump sums, there should a plan in place. If you aren’t sure how and when you’ll pay it back, Jacobi suggests coming up with “best-case” and “worst-case” scenarios, with plans for each. Set deadlines to make it fair for you and your lender, and to make yourself accountable.
6. Find out what your lender wants in return
Some friends might not want anything but to be paid back in full; some might want interest, or a stake in your business (a.k.a., equity). Make sure you discuss what’s in it for your lender before you take any money, Jacobi says.
If you’re borrowing money for more than a year, you might want to consider offering to pay interest. Due to inflation, the value of your friend’s money is more today than it will be in one year. You can use the U.S. Bureau of Labor Statistics’ inflation calculator to get a better sense of historical inflation rates and to help you decide how much interest may be appropriate to pay.
7. Get it all on paper
If you want to have a lawyer draw up legal papers, go for it. At the very least, type up a letter than explains the loan and the terms. This informal write-up serves more as a reminder of terms than anything else. Again, discuss what’s best for your situation with your friend or family member.
8. Say thank you
Be appreciative of this gesture. Say thank you. Once the loan is paid off, consider doing something nice for your lender in what Jacobi calls “a final flourish of gratitude.”
Don’t mix family with business
All that said, there are all kinds of reasons to avoid mixing business and family as you consider your business funding options.
Tim Berry, founder of Palo Alto Software (makers of Bplans) cautions that it can be hard to get out when it’s time to walk away from a business if you’ve involved family and friends in your funding plan.
It’s important to remember that challenging personal relationships won’t magically become less complicated when you add on a new type of business relationship. However you decide to fund your business, just think through the long-term consequences—both of your success, and of the potential of slower growth than you hoped.
Resources to help you keep your relationships with friends and family separate from their business support.
Friends and family financing FAQ
Friends and family financing refers to funds raised from personal networks, where individuals close to the entrepreneur provide capital to help start or grow the business. This can be structured as either loans to be repaid, or equity investments in exchange for a share in the business.
The biggest disadvantage of friends and family loans is the potential to strain relationships if the business fails or can't repay the loan on time. Clear communication and formal agreements can mitigate this risk but not eliminate it entirely.
Friends and family funding rounds involve soliciting funds from your personal network. Entrepreneurs present their business plan and investment terms to potential investors, who could contribute in exchange for either an equity stake or a promise of repayment.
Whether family financing needs to be repaid depends on the agreement. If it's a loan, it usually needs to be repaid. However, if the funds were provided in exchange for equity, investors are repaid through business profits or if the business is sold.