How to Raise Capital from People You Know

If you do not want to put in a loan application at the bank, you can also ask for business capital from people you know. The good news is that you already have a personal relationship so chances are they will not run a credit check or ask you to put up your collateral and they might even give you a good deal with a low interest rate. The downside is that the whole process from asking to paying them back can be a hassle.

Here are the best tips on how to navigate this situation to access the capital you need for your business:

Look for entrepreneurs. Seek an individual that is older and wealthy or has been or still is an entrepreneur themselves. These people are more likely to invest in businesses of people that they know.

Pay attention to the personal relationship. Do not ask for money from people who cannot afford to lose it like those on a limited income. Be sure that you will both feel okay ab out it when you owe the person money. Trust your gut and do not take money from someone who will be an issue.

Be prepared and have a business plan ready. You need to have a good description of how you plan to use the money and how and when you will repay them. Decide in advance of the request how much you need, what interest rate you will pay, and what kind of repayment plan and security you can offer and write that in your business plan

Use email to introduce your business idea. Email is a great way to cast a net gently with information. Describe what your concept is and invite people to contact you for your business plan if they are interested. Follow up with these people and discuss your capital needs. Ask them if they have any suggestions on how you can raise the funds.

Ask for advice. If it is too hard to ask for money directly, ask for advice. Explain what you are trying to do, describe what you need and ask for suggestions on how to accomplish your goals. These conversations are a great way to get financial support.

Suggest a range, instead of a fixed amount. When you start talking about money let your support other decide the amount by providing a range. Suggest up to three options if you do not fee comfortable using a range.

Offer a competitive return. Offer an interest rate that is better than what the person could earn in a similar-term financial investment.

Make an informal request. Be yourself, describe your business and your passion for it, describe your fundraising effort and gauge their interest. Indicate why you thought of them in particular. Do not confuse informal with unprepared. Show the person that you are prepared with a business plan and have the financing options ready that you hope they will consider.

Make a formal agreement. Treat the agreement the way you would if it was a stranger. If it is a gift you only need a letter from the giver. If it is a loan, you need a promissory note signed by the borrower and a plan for repayment. If it is an equity investment, you need a stock purchase agreement. When you formalize the agreement, both parties feel more confident because expectations are clear and both parties’ interests protected.

Offer to have the loan managed by a professional. Having a third party creates a neutral buffer to handle the business of the loan, allowing you to keep it arm’s length from the personal relationship. You want to be sure that the choice you make to help your business today doesn’t end up hurting it tomorrow.

Find companies that offer capital in your niche. If you have a niche business model, you might be able to find investors that offer funding to those types of companies. This does not mean that you will not need to look for additional sources of funding, but if finding tailored solutions streamlines your process of finding capital, it will be worth it in the long run.