At some point, your business could be strapped for cash. Whether you need startup funds or hit a rough sales quarter that you didn’t plan for, sometimes your bank account can’t absorb the hit.
Entrepreneur Dodie Jacobi had that problem. When two clients defaulted on a combined $130,000 worth of work, she was stuck. She turned to a friend to help get out of the hole.
“There was a lot of hesitation and anguish in my decision to ask for financial help,” she says. “I didn’t want to ruin my relationship with this person, but I was in a tough position without help.”
Jacobi, who is also a business coach, says that while borrowing from friends is not a situation you want to be in, there are ways to make the process a smooth one:
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.”
Have you ever borrowed money from friends or family? How’d it go? Let us know in the comments!