By Roger Pierce
When your new or existing business needs money you have several financing options to explore. One of them is ‘love capital’, which is money supplied from your family or friends. Please consider these issues before you take any money from the people you care about the most.
Is it a loan or investment?
A loan is a debt to be repaid usually with interest. Terms are negotiated (for example, five years to repay with 5% interest applied to the outstanding principal) and a first payment date is set. An investor in your business will typically receive ownership shares in exchange for an agreed price. Depending on the type of shares issued, the shareholder may gain the legal right to vote on your management strategy and decisions.
Since you know your benefactor personally and will see them at social occasions (think holidays, birthdays) you may want to establish some boundaries in terms of when and where you talk about business. For example, you may squirm when Uncle Larry, who lent you $20,000, asks about your sales this quarter while you’re trying to eat your turkey dinner.
Have a written agreement
We typically don’t ask people we know very well to sign a legal agreement, often preferring to proceed on a handshake instead. That can be a big mistake. Both parties have a right to clarity: Mom will want to know when to expect her money returned and you’ll want to know what terms she expects. Treat the deal like you would any other important transaction by preparing a simple letter of agreement to communicate your mutual understanding in terms of repayment, interest, rights, and default.
Hey, it's really easy to get "love capital" from family and friends because these people know and love you. Play it safe for everyone involved by writing up a simple agreement about the money you are receiving.