Paula P. Moore said it seemed natural to borrow money from her parents for her growing dance studio, Footprints Dance & Exercise Studio in Phoenix, which she started in her home in 1983. The $10,000 she borrowed from her parents went toward the down payment she needed to assume a mortgage on a building. She made sure that they knew it wasn’t a gift, wrote them a promissory note and paid them back every year.
Borrowing from family members or friends can provide ready cash, easier terms and a longer repayment period. It’s an option that many small business are choosing, says Bruce Hodgman, assistant district director for economic development with the Arizona Small Business Administration in Phoenix.
“The SBA estimates it’s probably the number-one source of money to start a small business,” says Hodgman. ”
Bankers are not enthusiastic about loaning amounts smaller than $30,000. Borrowers should expect to pay a third down at an interest rate of 10% to 11%. Bank loans also come with a long list of fees. Repayment periods for business loans run about three to five years without SBA guarantee, though the repayment period can be extended to as much as 25 years with an SBA-backed loan.
While the terms are often more reasonable, borrowing from those you know has its pitfalls. Family feuds and lost friendships can result if all the terms and expectations are not clearly articulated. Because of emotional ties, the business owner can also feel extra pressure to turn a profit. The following expert tips should help get your loan off to a good start:
- Set a businesslike tone. Even with your bosom buddies or kissing cousins, approach any business proposition in a formal, professional manner. Dress appropriately for the occasion and meet the person making the loan in a comfortable environment. Have a well-thought-out business plan or concept to show them.
- Put everything in writing. Doing so helps eliminate misunderstandings and is also important if you wish to qualify for a bank loan in the future. If you don’t have a lawyer to write out a contract, you can get a note at any business office supply store. Every detail of the loan should be addressed, including the payment schedule, interest rate, what happens if the business is sold and how the person making the loan will be updated on the progress of the business.
- Make contingency plans. Preparing for the worst, such as bankruptcy or death, helps protect those you care about. Arrange for paying off your debt in the event of a catastrophe. Add life and disability insurance to the agreement, with the lender as the beneficiary, as a guarantee of repayment.