While on the surface it may seem that business borrowing from family and friends is a simple solution to a hard problem, there is actually a lot more to it. It can be tricky, and many unforeseen issues can arise.
Make Business Borrowing From Family and Friends Work for You
There are some outside-of-the -box methods however, that allow for business borrowing from family and friends without all the drama. These options are much better than borrowing directly from loved ones. Of course, mixing business and family or friends will probably never be drama free, but these tips can make it a lot easier.
Business Borrowing from Family and Friends: Angel Investors
This option does include getting funding directly from friends or family. However, it works differently than a loan. Angels tend to be a lot more informal than most types of funding. They can be people you know. They can also be people you connect with through networking or other means. Your mom, dad, brother, sister, aunt, uncle, best friend, cousin, pretty much anyone can be an angle investor!
Angels are not covered by the Securities Exchange Commission’s (SEC) standards for accredited investors. But a lot of them are accredited investors anyway.
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To become an accredited investor, a person has to have a minimal net worth of $1 million, and an annual income of $200,000.
But, they don’t have to be millionaires. They could be friends or colleagues sitting on home equity, or local professionals who are looking to invest. Consider people you know well and people you don’t know so well. Angel investors could be people you grew up with or have done business with.
Even if you do not use friends or family as investors, finding an angel investor could convince those closest to you to help in another way.
Business Borrowing from Family and Friends: Crowdfunding
Here’s how crowdfunding works. You market your business on a crowdfunding platform, and anyone who wants to can invest in the company. Some platforms will even accept donations as low as $5 or $10 dollars, though most do require more. With rewards-based crowdfunding, you get some token of thanks for your donation. With equity-based crowdfunding, which almost always requires $500 or more, investors get an interest in the company.
This is not a sure thing. While there are a lot of successful crowdfunding campaigns, the majority are not able to fully fund their business through crowdfunding. According to Startups.com, the average success rate of a campaign is 50%, and 78% of crowdfunding campaigns reach their goal. It’s a good way to give friends and family a chance to help fund your business without them having to give a large sum of cash at one time.
Business Borrowing from Family and Friends: Kiva
Kiva is an online lender that is a little different. For example, the interest rate is 0%. That means even though you have to pay it back, it is absolutely free money. They don’t even check your credit. However, there is one catch. You have to get at least 5 family members or friends to give to your business. In addition, you have to pitch in a $25 loan to another business on the platform. This is another way those you love can help you fund your business without giving up a pile of cash all at once.
Business Borrowing from Family and Friends: Guarantor Loans
A guarantor loan is a loan that you get, but someone else signs on to guarantee that they will repay if you default. It could be a business partner, a friend, or even a family member. This is sometimes a better option for having a family member help with funding than getting funds from them directly. Still, the same caveats exist when a guarantor is using their credit to help you out. If your business fails, or you default on the loan, then your guarantor will bear the brunt of that – and they will, most likely, come after you to make up for any losses they incur.
If you have friends or family that qualify as a guarantor, they may be more willing to go this route. They can let you piggyback off their good credit without giving up any cash initially. Hopefully, they never will.
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Credit Line Hybrid
This is a type of loan that you can use a guarantor to get. The credit line hybrid may be for you if you have a credit score over 680 or have friends or family that do and are willing to cosign. You can usually get a loan of 5x the amount of your highest revolving credit limit account, up to $150,000. Honestly, this is more than what you could get on your own when applying for credit cards. Furthermore, you can get cash out on this program.
Also, there is no impact on your personal credit with this type of financing. It will not even affect a guarantor’s personal credit. A lot of business owners use the good credit of friends or family to help them get the funding they need. All payments report to the business credit profile, so you can build business credit at the same time.
Build Your Business Credit Score and Pay it Forward
Once you get the funding you need, work on building your business credit score. There are a few things you need to do to make this happen. However, once it’s done, you will have access to the funding you need, and you could be in a better position to help others rather than asking for help.
First Steps
The first step in the process is to establish your business credit profile. You do that by setting up your business to be a fundable entity separate from you the owner. That includes having separate contact information, using an EIN rather than your personal SSN, formally incorporating, and opening a separate, dedicated business bank account.
Once that is said and done, you can rest assured that your business accounts that are reporting will show up on your business credit report, thus causing your business credit score to climb. Not all accounts will report, but the Credit Line Hybrid does. That’s a good start. A business credit expert at Credit Suite can guide you through finding other vendors that you qualify to get an account with that will report as well.
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Business Borrowing from Your Family and Friends is a Stepping Stone
It’s not a long term solution. There are many business owners who get their start with the help of friends and family. That’s a good thing. It’s a great way to get the ball rolling when your own resources are limited.
However, you don’t want business borrowing from friends and family to be your primary solution for the life of your business. Not only will this source of funds eventually dry up, but it can also cause some major drama.
The key to being able to fund your own business, and keep everyone else on your side, is to work toward building a business that is fundable on its own. As you do so, you will see that your friends and family continue to cheer you on, and eventually that’s the only help you’ll need.
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