Most people don’t realize that over half the businesses in America are financed by money from family and friends. The truth is everyone relies on their circles when they have nowhere else to go. Someone with mediocre credit may have a difficult time getting a start-up loan from a bank, but Mom and Dad will always help out if they can.
Weighing the Pros and Cons
There are inherent risks and advantages to getting a private loan over a bank loan:
Risks:
• Not clarifying both parties’ expectations. If you don’t have a clear repayment plan and stick to it, it’s very easy to get behind or to never set the money aside to pay off the lump sum.
• Relationships can be damaged when money gets involved. Your lender can resent feeling used or taken advantage of if you default. And either party can get hurt if they feel the money is being valued over the relationship.
Advantages:
• Flexible terms—typically the repayment doesn’t start immediately, and you can create a payment schedule that works for both you and your lender.
• Better interest rates—This is particularly true if your alternative is credit card financing. And with most start-up businesses, banks are probably going to steer you in that direction.
Show Them You Mean Business—Getting Outside Help
Loan administration companies minimize the risks involved in private loans by creating legal documents and administering repayments. By approaching your friends or family with a legal agreement for you both to sign, you can help allay some of their fears. Says Asheesh Advani, president and CEO of
http://CircleLending.com, “The more you do to reassure them you have a plan in case you can’t make a payment, the more they feel that you’ve thought this through and that the relationship will survive the transaction.”
If something should come up, and you know you’re going to be unable to make a payment, you can go to your loan administrator ahead of time. With the permission of your private lender, they’ll spread your missed payment over the life of the loan. Or they’ll restructure the loan and lower your payments. But they’ll help work out an arrangement where you both feel comfortable.
A major benefit of having a loan administrator is the security it gives your investors that your loan will stay on track. Each month, the loan servicing company moves the money from your account to your lender’s account by direct debit and direct deposit. This way, there’s no chance you’ll be out of town and forget, or be late with, a payment. Says Advani, “It’s a great way to not find yourself in a hole.”