(First published on Women Lawyers Mean Business website.)
Being a woman entrepreneur comes with its own host of challenges. Securing adequate capital is at the top of the list. On average woman business owners launch their companies with much less funding than their male counterparts.
One avenue for generating funding is asking friends and family to invest in your idea. This is a feasible option with 38% of startups being funded by friends and family.
But getting there can prove tricky as money can be a sensitive subject for many, with most understanding the risk of straining the relationship when loans are given to family and friends. When surveyed, 82% of Americans said they would not lend money to a friend or family member.
Getting over that hurdle and successfully engaging your close relations in funding your business can happen if you take the right steps.
But then, what about the added stressor of owing money to those close to you. What do you do? How can you take care of your business and your relationships when asking for funding from your friends and family? Here are some best practices for maintaining healthy connections and boundaries with friends and family while securing capital for your business.
According to a recent study, 69% of Americans have less than $1,000 in their savings. For this reason, be selective in who you approach and bear in mind that those over the age of 65 generally have larger savings and may be more willing to loan money to startups.
Treat the discussion as professionally as you would with a bank lender or venture capitalist. Begin by setting up a time to talk, preferably in a comfortable or familiar place, such as their living room or in a local café. Talking about money can be touchy; take measures to consider their comfort.
Come prepared with your business plan, ready to thoroughly explain your business idea with the use of brochures or product samples.
Clearly lay out the risks involved as an investor and answer any concerns they may have as best as you can. A large proportion of the people who said that they wouldn’t lend money to a friend or family member did so because of past experiences that ended relationships. According to a survey conducted by Bank of America in 2017, 53% of respondents said they have had relationships ruined over money squabbles. Bear this in mind and be sensitive to the tenuous nature of family/friends investor relationships.
To put their mind at ease create a written contract detailing the terms of the loan and agree to sign a loan agreement that thoroughly describes how you will repay the loan.
Wrap up the meeting by giving them time to think it over and reminding them that there is no pressure or obligation if they do not want to lend you money.
How to Sweeten the Deal
To make becoming an investor more appealing, give your audience some options. Rather than a loan, you can arrange for them to have an equity interest in the business. This provides that they are part owners in the business. A plus for them is that they will gain from any profits the business makes. While a “pro” for you is that unlike a loan if the business fails, you do not have to repay anything. However, a major “con” for them is that they would also be liable for any losses.
To mitigate the risk to the investor (and safeguard your relationship) you can set up your business in one of three ways, each providing that the investor is not involved in the day-to-day running of the business.
1. Corporation – As a corporation, your investor becomes a shareholder and is not liable for losses
2. Limited partnership – as the name implies the investor’s role is limited and precludes liability
3. Limited liable partnership – the investor is a “member” and, again, is not liable for losses
If your friend or relative lends you a large enough sum of money, there may be Federal taxes taken out of that, so prepare yourself for that.
If you are thinking about accepting funding from friends and family, you can never prepare for every eventuality. However, with enough thoughtful, thorough, and professional planning you will find the road to raising capital much smoother and your bonds of friendship and family within your inner circle kept intact.