How to Approach your Family to Be the First Investors in your new Business

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.

Presenting Yourself

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.

Separate Emotions

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.

Difficult Relatives

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. 

HOW CREDIT FUELS GROWTH IN THE ECONOMY

Credit is one of the most important aspects of economic growth because it multiplies that growth with the addition of extra money from lenders. As an example: if you have $10,000 to spend on an investment, but you have the ability to receive a loan of additional $5,000, the extra cash increase the value of your investment by 50%. And as long as the extra investment yields a higher rate then the cost of the loan, your return is higher than if you did not use the loan, adding to bigger and faster economic growth. 

This is why the increase in debt of an economy ultimately leads to a higher GDP which in turn leads to further productivity growth.

When there is a continuous expansion of credit, there is an upward prosperity. This is the case because when there is an increase in investment and consumption; more jobs are created for the people, and income and profits increase too. 

Also, the price of assets increase, and this includes property and stocks which boost the net worth of people. Eventually, the owners of these assets acquire more wealth which can be used as collateral. This increase in collateral will lead to the ability to borrow more and keep investing more, and the cycle continues.

Credit scores and credit history gives the credit market a balance system to not allow it to get out of control with rising defaults. But there are other risks associated with a credit driven market. Such as formation of bubbles: when credit is in excess, there is the risk of assets overvalued, which leads to a collapse. This could lead to social chaos. 

Also, an increase in national debt could cause a major default if there is an unforeseen economic disaster, running the country and its citizens to bankruptcy.

If you are in the market for a loan, it is important to understand the benefits just as much as the risk so you do not go about it with an anxious mind set that credit is bad. In many ways, a loan will allow you to attain what you want as long you are focused and aware to manage the money.

INVESTMENT PROPERTY INSURANCE – Landlord Policy and Fix and Flip Insurances

When buying an investment property, many things are considered, such as cost, maintenance, and location. But what about the right insurance? 

Investment property insurance, or landlord insurance, can protect you from the many problems you encounter and from the issues unique to an investment property. Your investment can either be as a rental or for resale (“fix and flip”), and this exposes it to different coverage.

The type of insurance that covers for rental properties:

There is the landlord insurance policy. This typically includes building insurance, and it is for any damages that can happen to structures such as garages, fences and swimming pools. Also, it has the general liability coverage for injuries and accidents which may occur on the premise.

Vital to landlord policy is malicious damage cover. This will cover you in the case that your property is vandalized and deliberately trashed. It is important to get malicious cover damage that also INCLUDES anyone that occupies the premise, since there is a chance your tenants or their guests might be responsible for the damage.

Another important feature to have is rental default insurance. In the event there is damage to your rental property that makes it uninhabitable, any loss of rent you would incur would be paid to you by the insurance coverage. This lasts for a specified date or the length of time it takes to make the premise habitable again.

Coverage for legal fees from tenant suits should be included in your Landlord policy. This liability coverage is especially crafted to help cover the cost of any litigation against you as a landlord from tenants or their guests. 

The type of insurance for resale investment properties (“Fix and Flip”)

This type of insurance is unique to remodeled homes which are planned to be sold in the near future. Since there is not much items or personal belongings, the coverage is minimal for personal damage. There are insurance products called “Vacant home Insurance” which caters specifically for this type of property and covers the bare essentials in the case of damage or theft.

What is important is to get coverage that protects you while the remodelling work is being done, as well as coverage that protects the structure itself while it is in your hands. Also, any policy should include the value of the new materials used even though you insured it before the remodeling took place. Keep updating your insurance agent if you replaced new flooring or added more square footage to the property.

It is important to have your property be worked on with a licensed contractor for insuring fixer properties. You don’t want the insurance to have a reason to deny coverage in the case of any loss you incur.

Once you sell the property, these type of insurance policies have an easy cancellation feature. This will allow you to move on to the next project.

HOW TO BECOME A PRIME BORROWER FROM BEING A SUBPRIME BORROWER

Prime borrowers are considered best for lenders. They have credit history showing they are more likely to make loan payments on time and also repay the loans in full. Given all that, prime borrowers tend to get favorable interest rates and have easier time getting loans. They typically have a score greater than 620. 

If you are considered subprime by lenders, you may have some negative marks in your credit history or have too much outstanding debt. This makes you a risky borrower to the loan markets. The interest rates are normally higher, and requirements are subjected to many conditions and terms, making it hard to get approved. 

Your goal is to become a prime borrower, and there are ways to speed it up.

To move faster from being a sub-prime to a prime borrower, you should first analyze your credit report. Look for items that are not verifiable and use that to your advantage since it does not have any proof or reason to impact your score negatively. Reach out to these creditors as they are legally required to remove negative information off your report.

Secondly, ensure that you pay your current outstanding bills since in most cases current bills have much more weight than older entries. Also, if you need a long term loan at the moment, it might be worth a try to always take loans from sources that don’t necessarily show up on your credit. This will not put you in the risk of showing more debt. 

Approach your friends or family that you trust and ask them to add you to any of their existing credit accounts. This works only when the credit account has been opened for more than two years. Their positive history will help  improve your credit score. Do this only when you are sure they will always be current on their accounts. 

Take out a loan or consumer credit which you know you have the ability to pay in full very soon. Allow a few minimum payments with interest and then make a full payment to close out the account. You can get these loans online or at stores that open credit cards to purchase their items. Even credit for low amounts such as $500.00 will help. Before doing this, make sure whichever loan you take does not have a pre-payment penalty.

In a nutshell, to move from being a sub-prime borrower to a prime borrower, you will need to take some steps such as;

  •    Paying your accounts on time
  •    Minimizing the number of accounts you open
  •    Only use a portion of your available credit
  •    By all mean, avoid letting your accounts go to collection

Once doing this, over time, you will be seen by lenders as a prime borrower and receive the benefits associated with it.