Money & Finance
Ask SCORE                                                                        Word Count 402

Structure Loans from Family and Friends the Right Way

For many small businesses, bank loans, venture capital and money from
angel investors are financing long shots at best. It is far more common for a
small business to secure funds from family members or even friends.

In fact, more businesses are started with loans from friends and family than
from any other single source. The money comes from aunts and uncles,
brothers and sisters, moms and dads, grandparents, in-laws, roommates,
mentors, personal lawyers and many others.

Availability is the big draw. The downside is that business loans from family
and friends also can be a disaster is they are not done right. Unstructured or
loosely structured financing and payback terms can haunt both sides later on.
Research shows that 14 percent of business loans from family and friends go
into default, compared to about one percent for bank loans.

To increase the odds of success, approach family and friends with a detailed
loan proposal, including financials from your business, just as you would a
bank or venture capitalist. Be frank about the risks. If things go badly, they
could lose all or some of their money. Consider the consequences of a soured
business deal to your relationships.

Pick a financing structure that works best for your business and make certain
everyone understands it. Specifically, be clear on whether the deal involves an
ownership stake in your business, or whether it is a simple debt you plan to
repay.  And be clear about repayment terms.

To legally seal the deal, use a document such as a “Promissory Note.” Putting
the terms of your borrowing agreement into proper legal form is crucial. You
can find the downloadable legal documents you need, including many different
Promissory Note variations, at www.findforms.com.  Self-help legal publisher
Nolo also offers loan forms and related information at www.nolo.com.

Another helpful resource is CircleLending.com, a company that provides loan
administration, recordkeeping, payment processing and structural support for
these types of loans. CircleLending takes verbal deals and turns them into
legitimate business transactions.  Check the small business section of their
Web site for information.

To learn more about financial issues facing your small business, contact
SCORE "Counselors to America's Small Business." SCORE is a nonprofit
organization of more than 10,500 volunteer business counselors who provide
free, confidential business counseling and training workshops to small
business owners. Go to www.scoredm.org on the web or call (515) 284-4760
between the hours of 10:00 A.M. and 3:00 P.M. Monday through Friday.