As a new business, your market share within your industry is small, your income is most likely small, and your business transaction history is small. These are all recipes which would most likely reject you from getting a bank loan.
But your business needs capital to grow.
This makes your family the first avenue to approach for finance for your new business. Understand that this is a very common way for new businesses to receive seed funding, and many of the largest companies were first financed by the founder’s circle of friends and family.
But it is important to approach them correctly; just because they love you does not mean their pockets are open to any business idea you have recently created.
Because you are approaching your family to be the first lender in your business, your confidence level that they are much easier to persuade might allow you to keep things informal.
However, if you approach them as a relative having a personal chat with them, they might accept your business as a personal topic without much regard to the importance of your business. If you approach the conversation in a professional manner, they will no longer view you as a relative but as a distinct business person with an opportunity for them to make a return on their money.
Some examples is to dress in a business professional attire; having a prepared presentation with business outlines, power points, and financial documents; and having the conversation in a setting outside of your normal gathering with that family member.
Explain The Risks and Rewards
When it comes to asking your family for money for a business investment, you must explain to them clearly the risks and rewards of the business. Be truthful.
This is because creating a rosy picture to be able to get their money and then if the business does not perform as they expect, you now have a very sour relationship with someone you cannot just cancel out of your life.
This is the hardest part. When you fail investors who are not related to you, you can fix the problem and disconnect with them. When you fail investors who are related to you, though, you cannot disconnect with them.
It is a given that when dealing with family on any issue, there are always emotions that are involved. This is a given, you have grown up with your family and have a deep sense of love for them. But when it comes to asking your family for money for a business investment, its vital to separate your emotions.
If they say no to loaning or investing, accept it the same as you would with any other investor/lender. If they say yes and do give you the funds, create the necessary paperwork for them to secure their money.
Also, the emotional component goes both ways. Because they are family, they might expect you to go above and beyond for their money, and let them know clearly during the presentation what it is you can and cannot do for them.
Some relatives are easier than others when it comes to wanting to invest their money in your business. But you might have that one relative which not only will reject your business proposal, but also try to persuade other relatives to reject it as well.
This is not fair for you, because every business opportunity has a relative risk, and what one person finds highly risky, another will determine it as low risk.
To avoid this toxic rejection by that relative, it is important to combat this from the beginning. First, identify which relative(s) could create extra difficulty for you, and approach him/her independently before speaking to others. Let them know that they are the first person to know about your new business, and this will not only give you a test run for other better potential family members, but also get the surprise out of the way in case that difficult relative speaks to others.
If that difficult relative is the last person to approach, they might create fear on the family members which have already agreed to invest, risking the deal with them. It is a lot easier to close on a deal when a family member feels 100% secure in their decision after hearing all the negatives first.
Give Back in Other Ways
Although there is a fine distinction between a family loan and a bank loan, the most obvious is that the family will see you in times you are not in business. This can create an awkward situation if things don’t go as expected. But allowing yourself to give back in appreciation to your family, as they gave appreciation to listening and possibly giving you money, not only does it help you become a better relative, but also allows you to navigate your relationship with them more confidently during the ups and downs of your business.