If you are trying to get a new franchise business off the ground, you are going to need money upfront — lots of money. Before pursuing bank loans, backing from investors, or even credit card advances, you might want to first consider approaching a family member for financial help.
And while there are certainly many concrete benefits to borrowing money from Aunt Ruth over a cold and impersonal financial institution, it’s not always a walk in the park; sometimes emotions and personal relationships (those things that are rarely an issue when dealing with a business-focused third party like a bank) can turn that “walk in the park” into a treacherous walk through a minefield.
When mustering up the courage to ask a family member to open his or her wallet for you, be sure to consider the helpful advice below:
- Put your agreement in writing. Proceed with borrowing money from a family member in the same way you would from a lending institution. Consider having a lawyer draw up all necessary paperwork that states the nature of the transaction, and be sure both parties are in agreement about how the transaction will be carried out. If this is a straightforward loan you are asking for, be sure to present your relative with a signed promissory note along with a specified interest rate. Failing to be clear about the details of the agreement upfront can cause serious problems down the road — you might think of the money Uncle Chuck is giving you as a loan that will eventually be paid back; he may be thinking of it as an investment into your franchise, one that will reap hefty returns for him once you get rolling and the earnings start pouring in.
- Look for lenders rather than investors. When you and your family member sign off on a loan agreement, all you are required to do by law is to pay it back with interest. You may go into a bit a debt for a while getting the franchise on its feet, but you’ll eventually get the loan paid off. If the family member who is eager to lend you money wants to invest in your company, proceed with extreme caution — when a family member becomes an investor, stock, ownership interest, and power-wielding abilities in the franchise’s business dealings and expansion comes into play.
- Don’t underestimate the effect money can have on people. It may seem like common sense, but be absolutely sure the family member you are borrowing funds from can be depended upon to stick to the agreement that you both settle on. The last thing you want is a battle within the family about something that can be simultaneously small and enormous — money. Your aunt who writes you a check for $10,000 while laughing and telling you that “it’s only money, honey,” could turn around in six months and demand half of it be repaid by the end of the week.
- Repay the loan as you go. Look into devising a cash-flow agreement with your relative as a way of paying back the loan. This is easy to make happen — all you need to do is figure out a fixed percentage of your franchise’s cash flow (earnings, essentially) to immediately go to the lending relative until they’ve been fully repaid with interest. In many cases, this can be the fastest way to eliminate the stress and worry of repayment that accompanies borrowing money from family.
- Honesty is the best policy. Be blunt in explaining to family members the risks involved in lending you money for your franchise — in fact, create a scenario for them in which the possibility that they never see their money again is an actual reality. Never allow a family member to believe that there’s no way you could possibly fail.