So you have a business and need some additional funding , well financial institutions are unlikely to give a small business a loan with no collateral and/or no credit history.
And, if your business lacks a track record, it’s doubtful you can get venture capital.
Where to turn?
Sometimes the only place you can turn are Friends & Family.
The National Entrepreneurship Center (NEC) actually endorses this idea, but it needs to be done carefully.
Done improperly and you run the risk of losing or destroying those relationships. Just think of the [high school reunion/family reunion/poker night] spent with people who think or know you blew their hard saved money.
So if you do borrow from F&F or they invest in your business, make sure you do it write.
1) Write out the plan. First step, have some business plan – and it doesn’t have to be some 20 page MBA business plan—but some plan with goals and how to meet goal and analysis of market and competition, etc.
2) If a loan, make it an official loan agreement (principal amount, interest rate, length of loan, and collateral used to secure the loan). Get an attorney to draft (especially if you are the person lending the money).
3) Define of person with money is a lender or an equity stakeholder
4) Document everything. No handshakes here.
5) Business better be absolutely clear with person loaning/investing on exactly how the money will be used & how it will be repaid.
Investors/Lenders ask yourself: “If I didn’t know this person, would I still think this was a good idea to lend the money to them?”
Make sure you don’t draw up your own legal papers. I’ve seen what non-lawyers can do & it’s scary.
I got to witness this first hand when I invested $1000 in a friend’s movie production. The movie was completed and even put on DVD. Then I watched as the friend blatantly went to lunches as a “movie expense” with others that had nothing to do with the movie and bragged about buying computers “for the movie”. Frustrating? You can bet I’ll never invest in another one of his flicks, especially after he turned down a $100,000 purchase to distribute the movie internationally.
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