The cost of starting a small business has never been lower. In 2009, the Kauffman Foundation, an organisation that campaigns to help individuals attain economic independence by advancing education achievement and entrepreneurial success, estimated the average cost of a new business start-up at $30,000.
The actual cost of starting a new business in 2015 is potentially much lower. With the surge in e-commerce and ‘bedroom businesses’ the average cost could be as little as $1,000 – $5,000. Facebook founder Mark Zuckerberg is one of the more famous examples of a successful entrepreneur that started working on what turned out to be a million-dollar idea from his bedroom, Forbes magazine even put the cost of starting a new business online as low as $500.
But even with start-up costs low enough for just about any budding entrepreneur to take advantage of, that first round of business funding can still be hard to come by, and so quite often we turn to a lender that overlooks weak points, provides flexible terms, and offers a dream-come-true interest rate: the Bank of Mom and Dad.
Without an established track record, start-ups often have trouble getting a traditional bank loan or funding from venture or angel investors. This often means turning to friends and family members which can often lead to strained relationships with those close to you.
Research conducted by AXA Business Insurance shows that almost a quarter (24%) of small business owners rely on friends and family for finance, with 39% of those surveyed saying they feel uncomfortable about asking their nearest and dearest to bankroll their business aspirations and 63% admit to feeling guilty.
So what is the best way to borrow money from friends and family for your next million-dollar idea?
- Talk about it – Have an in-depth discussion with your potential lender before you take their money. Make sure they understand what you need it for, how you’ll use it, how you’ll pay it back and when. Explain your business plan as best you can and discuss any risks involved for both of you.
- Set boundaries – Be realistic about your expectations and understand the unsaid assumptions made on either side. Does your lender think they have a right to a say in your business? Do they expect some kind of a ‘thank you’ they haven’t mentioned.
- Prepare the proper paperwork – Take professional advice and draw up a contract that covers the amount borrowed, the repayment period, the interest if any and the other obligations on both lender and borrower. Online services, such as Prosper Inc. and Virgin Money, offer to structure arrangements between borrowers and individual lenders, who are often relatives or friends.
- Involve others – Having a neutral person to review and witness the agreement is incredibly beneficial to protect both parties.
- Protect yourself and your investor – You can’t predict the future but it is important to take logical steps to protect yourself from unforeseen circumstances. Double check you are meeting all your contractual obligations and are covered should the worst happen. Research and have the correct business insurance to make sure you are doing all you can to look after your business so both you and your investor are protected should you need it.