Whether you’re in search of capital to launch a business, purchase equipment or inventory, or are simply looking to expand your operations, getting the money you need may be a difficult task if you’re relying on traditional sources such as banks.
Many small business owners are adapting to this new reality and using creative funding alternatives like microloans, social lending networks, and factoring.
In addition, requesting loans from friends and family has become a much easier and more manageable process with the help of companies like Virgin Money.
The idea is not new, of course. For as long as there have been entrepreneurs, they’ve sought help from friends and family when in need of startup capital. Now, however, companies like Virgin Money have added new tools and technology to better structure loans from people you know.
And when you’re equipped with a more structured approach, it’s much easier for you to approach potential lenders in your social circle. You have a nice packaged proposal, not simply a tap on the shoulder and a winning smile.
Companies that help you borrow from friends and family will have a list of all the necessary steps to obtain a loan in their web-based systems. This makes it simpler to do things like formalize your loan agreement, calculate payments, track and record payments, and send automatic payment reminders.
The first step is deciding whether you’re looking for a secured or unsecured loan.
Next you’ll need to define the terms of the loan, including the schedule of your payments and interest rate. The interest rate you propose will (or rather should) be much lower than you’d ever get from a bank, but it must be high enough to offer an equal or greater return than what your lenders would get in a plain old savings account. Otherwise they have no incentive to give you money (aside from that winning smile we mentioned earlier).
Finally you’ll be ready to take your proposal to your friends, family, and/or other potential lenders in your social circle.
Companies like LendingKarma offer a loan-payment tracker that helps lenders and borrowers track and view payments, which makes the whole process much easier and less intimidating. In addition, the site sends payment reminders to the borrower via e-mail to keep them on track with payments.
Another company in this field is LendFriend. It has a free loan-management tool that helps you build a loan proposal and create a repayment schedule. The system will also send you e-mail reminders when your payment is due, all done online for free.
If a lender is looking for additional financial protection before they loan you money, you can add a legally binding agreement, known as a promissory note, for a small fee.
One of the appealing aspects of LendFriend is its partnership with PayPal. This setup allows you to make your loan payments through PayPal instead of mailing a check to your social lender.
Keep in mind that these types of loans are agreements between friends and family, so it’s important to find the right loan partner to submit your proposal to. Once you’ve done that, it’s usually best to approach the person with the same type of professional demeanor as you would the lenders at a bank.
It’s also important for you to convey your plans and your enthusiasm for your project. Do you have sample products or a business plan? Present them. Then people can see how serious and well prepared you are for your new venture.
Once your chosen loan partners receive all the details of your loan proposal, they should be given an opportunity to make a counterproposal and adjust the loan terms.
After both sides agree on the proposal, there are a few more tasks that must be completed before the loan is finalized and activated.
Whatever you do, keep it friendly and don’t let money drive a wedge between you and your friend or family member. The many companies offering innovative tools to formalize the loan process between friends and family can help in this department.