Friends/Family/Angels

You've heard it said, "It's not what you know, but who you know". The same can be said about obtaining business funding. Perhaps you have a rich relative or know a retired businessperson with the desire to help you succeed. Sometimes these individuals can be the best source of loan money.

Often times, money can be borrowed interest-free or at a rather low rate from friends or family, which can be very beneficial to a start-up company. In this way, you can avoid paying the would-be middle man. You will fare better because you'll likely be paying less interest than you would at a commercial bank and your friend or family member will be earning more interest on their money than they currently are in a certificate of deposit or money market fund. This said, there is no quicker way to turn family or friends against you than to compromise their financial assets or their trust. Following are some tips for treading on this "thin ice":

  1. Pay out at least semi-attractive interest; help them feel as if they're getting something out of the deal.
2. Consider including a clause allowing investors to remove their money at any time.
3. Take the time to draft a thorough promisory note/lending contract.
4. Make sure there is clear agreement on interest, payment schedule, and collateral.

Angel financing is another great option to consider. "Angels" are private individuals who invest in the early stages of company development. They generally have experience with and interest in local business. Often times these individuals are retired business owners. You will find angels to be rather idiosyncratic and you should try to master their whims. Secrets to luring angel investment include:

  1. Seek out potential investors.
2. Write both a presentation and a business plan before you meet with prospects; first impressions are huge.
3. Create a term sheet, a one-page outline of the investment opportunity your company affords.
4. Specify a valuation, your best, fair, objective estimate of your company's worth.
5. Target locals.
6. Keep investors informed-they have a vested interest in the success of your business.



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