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How to ask family and friends to invest in your small business

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If you have exhausted other financing options, for your small business, and are now considering asking family and friends, for business funding, you should understand that there are certain rules you should follow. Following these rules will not only make the process easier, but allow you to keep important personal relationships intact and healthy. The first thing to keep in mind is that you should never take personal relationships for granted, or expect someone to give or lend you cash, even if you feel they have "money to burn." Here are the rules you should know about how to ask family and friends to invest in your small business-

  • Remember that your friends and family are not banks, so don't treat them like one-While bankers and investors expect to be asked for money, family and friends do not. It is always a bad idea to catch someone off guard, so make sure that you are taking the time to prepare. Put yourself in their place and remember that if you were being asked to invest in something, you would want information, and the time to think things over. Your family and friends deserve this same courtesy.
  • Know what you need before you approach them-Before you bring up the subject of money with family or friends, you need to be sure to thoroughly think through what you want to ask them for. You should have an amount in mind, repayment terms, and any other conditions you feel are needed. You will want to think through all possible options, most of all, you should also think about what is not acceptable. You will want to be prepared to negotiate, or politely decline an offer, that does not meet your business goals, or that might sour a personal relationship.
  • Keep it business-like and set up a meeting-It can be helpful if before you ask for something specific, you broach the subject in advance. You will want to give the person you are planning to ask for money, time to think about whether or not they are interested, before you even ask. You can do this by setting up a business meeting, or invite them to lunch (you pay) and tell them you want to discuss a business opportunity with them.
  • Prepare a sales presentation-If you have a business plan (which you should before asking anyone for money), promotional literature, or financial reports, you should give them this information before the meeting takes place. Remember that just because the person is a family member or friend, do not expect them to be excited about offering money without being "sold" on the idea, first. You should take the time to prepare, and deliver, a marketing strategy or sales pitch, just as you would do for an investor or lending institution.
  • Always put everything in writing-There are many small business owners who have found out the hard way that few things can sour an otherwise good relationship, faster than a misunderstanding over money. If you are asking for money for a business purpose, then you need to make it a business transaction. Even if the lender says that formalizing the loan or investment capital is not necessary, stress that it is. This should be done not only to protect the person giving you money, but to protect yourself and your business. You want to make that the terms of borrowing, or investing, and any repayment terms, are clearly spelled out in a contract or agreement. Then make sure that all parties involved in the transaction sign before you take the cash.
  • Keep up your side of the agreement-It can be helpful to the relationship that you keep your lender in the loop. Let them know how things are going and they will be less anxious. In addition, do not use the money for anything else then what it was agreed on. And most of all, stick to repayment terms, and anything else that was agreed to in writing.
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