Getting a loan to start a business has never been easy. After the economic crisis of 2008, it became even tougher. If you don’t have impeccable credit and a significant piece of collateral, it can be really hard to fund your startup idea.
You might feel better to know that only 25 percent of people actually start businesses with bank loans or credit cards. Over half of new business owners, at some point, borrow money from friends and family. The advantage of borrowing from loved ones is that they look beyond your credit score or bank balance. They often require little or no interest when lending money, and they want to see you succeed. The disadvantage is that if you don’t repay the loan, you could create serious rifts within your family.
If your credit score is holding you hostage, or if you don’t have enough cash flow to secure a bank loan, borrowing from family might be your best option. Follow these tips to keep that loan from wrecking your family relationships.
Set a Realistic Repayment Schedule
Many people borrow money from family members and tell them that they’ll repay them within a certain period. Unfortunately, they make those repayment promises based on overly optimistic estimates of how the business will perform. You might want to get your business degree first to understand how everything should work, or ask a professional for help with forecasting how much money you’ll make. Then, keep the following things in mind when setting up your repayment schedule:
Don’t expect your business to take off quickly. Your business might not even make a profit for a few years, so don’t promise to repay your family within 12 months. Set more realistic loan lengths that are consistent with what banks offer: seven years for working capital, 10 years for equipment, or 25 years for real estate.
Offer to pay the money back in regular installments. Avoid promising your family a lump sum at a future date. It’s too easy to avoid setting aside the money because you’ll always need it for other things. Instead, set a monthly repayment amount, and make it part of your business budget.
Make repayments on time. One of the best ways to show good faith to your family is to make regular, consistent repayments on the loan. Even if the payment is small, if you’re repaying it like clockwork, you show your family that you’re dependable and that you will pay the money back in good faith.
Communicate about problems immediately. If you’re going to miss a monthly repayment, tell your family as soon as you realize that you’re coming up short. Then, examine your cash flow, and tell them when you can restart your installment payments. Don’t say, “I’ll have it for you next month” if that’s not a realistic promise.
Be careful about paying off the loan too early. When family members agree to a seven-year loan, it’s okay to take the full seven years to pay it back. Avoid the temptation to pay off the loan when you get your first influx of cash. Instead, use the extra money to invest in improving the business or as a cushion against future lean times.
To show your gratitude for the loan, give your family remembers something in return. Pay your loan back with a little interest, or give your family members some shares in your company. If your business is successful, give your family members something nice when you make that last repayment. Send them on a nice vacation, or hand them a lump sum check to thank them for making your dreams come true.
Don’t Feel Bad for Asking
Everyone has that wayward uncle who comes to the table during Christmas and offers a super-secret investment that’s going to transform every family member into a millionaire. Before you ask for money, remember that you’re not that wayward uncle. You’re not offering family members a secret oil well in Algeria or signing them up for your latest pyramid scheme. You’re offering them the chance to give you support, to give you help, and to make (perhaps) some money for themselves in the process.
Accept the loan, say “thank you,” and then go build a successful business. You won’t wreck your family relationships. You’ll make your family proud.