Friends & family investors: How to keep things professional

March 22, 2018

Running a small business can be nerve wracking—particularly when the stress point involves money,. Whether you’re scrambling to buy big-ticket items, expand into a second location, or weather a slowdown, cash is critical. But how do you quickly secure funds?

Some business owners turn to friends and family as a funding source, but you should tread carefully if you exercise this option.

First, weigh your financing options

While your first impulse might be a bank, the big ones are notoriously stingy with small businesses. Only 25 percent of loan applications were approved in 2017. That’s more than double the number given out during the recession, but still represents slim odds.

Community banks are more willing to help local businesses. Nearly 50 percent of applications from small businesses are approved, while credit unions approve 40 percent of loan requests. All of these banking options have good repayment terms, but the application process is slow, cumbersome, and often not worth the time if your credit score has been dinged.

Alternative lending sources are much easier to apply for, but watch out for high interest rates. Online options such as Lending Club give you quick quotes, or you can submit an application to an entire network of lenders through services such as Fundera. Carefully compare offers before making a commitment.

For Clover merchants, a safe, easy way to get a cash advance is through Clover Capital. You can borrow up to 100 percent of your monthly average credit card sales. Repayment is totally automated. Clover simply withholds a small portion of your credit card sales each day—no hassles for you.

Consider friends and family

Don’t forget about the most popular funding avenue, which is friends and family. In the startup arena, Fundable reports that 38 percent of founders raise money from their friends and family—collecting over $60 billion per year in total.

This time-honored way to launch entrepreneurial dreams is also great for financing business projects. Expanding your restaurant’s capacity, opening a second store, creating a new menu by a hot new chef, rolling out a marketing blitz—all these prospects require commitment, an element of risk, and an infusion of money.

Many merchants tap their trusted circle to help grow the business. With an appealing elevator speech and a solid plan explaining what you want to accomplish, you can eliminate the red tape of banks, while getting the best repayment terms.

But all good things come with caveats. Your friends and family like you, so they’re willing to invest in the business. If anything goes wrong—your project doesn’t pan out financially or you fall behind on payments—the relationship can sour.

Keep it professional

No one wants strained ties with the people they care about. That’s why it’s smart to clearly set the terms of the deal. Beyond a handshake and verbal confirmation, prepare a simple document that states exactly what you’ve agreed to, including the loan amount and repayment plan.

With friends and family loans, you have some flexibility in structuring payments. While a fixed schedule is the most clear-cut option, you might also offer a share in the business or tie re-payments to revenue growth.

Sharing your success with others can bring a welcome dose of support, especially if the investors have business expertise and are willing to advise you. On the flip side, the mentorship can quickly become a nuisance if the investors are ill-informed or meddlesome.

Think hard about the potential upsides and downsides of sharing profits with friends and family. Also, weigh the impact on your relationship if you fall behind on a loan. There’s no one solution for everyone, but if you clearly consider the pros and cons, you’re more likely to pick the best one for you.

Lastly, consider having an intermediary handle the repayment process. The US Small Business Administration suggests using a peer-to-peer lending company. You and your lender decide on the repayment terms, and the outside company manages the transaction for a fee.

Everyone needs funds to keep the business moving forward. While locating that money can take some thought and effort, it’s not as hard as it might seem. Find the right option, and kickstart the next stage of your business journey.

Clover is sold by leading U.S. banks including Bank of America, BBVA, Citi, PNC, SunTrust and Wells Fargo. You’ll also find Clover at our trusted partners including CardConnect, Restaurant Depot, and Sam’s Club. For more information, visit us at