The Executive Headlines

How to ask your family and friends to invest in your business?

Startup Insights

The Executive Headlines
2021-05-06 14:50:31

Asking for help is one thing; asking for financial help is another beast all its own. Yet many small businesses and startups turn to family and friends to help fund their company.

Many entrepreneurs bootstrap or self-finance their business. But that doesn’t mean every founder saves up their own money, opens a line of credit, or seeks a bank loan. For some, it makes sense to ask friends and family for financial support.

1. Be professional

Above all, treat your friends the same way you would treat a professional or angel investor. It doesn’t matter if they are your drinking buddies or if you have known them since grade school. Separate your personal life from your business life. And when it comes to business, treat your friends professionally – without exception. This should set the tone for the rest of the professional relationship.

2. Be honest

Create an investor’s presentation and give them an honest appraisal of the business. Make sure they understand the benefits and the risks of investing in your business – including the risk that the business could fail and they could lose all their money. This last point is key. However, many entrepreneurs avoid saying it because it’s uncomfortable. Take the time to develop an accurate business plan and show them realistic sales forecasts.

3. Make them aware of the risk to avoid misunderstandings

An important part of maintaining a good relationship with an investor is being honest - with yourself and with them - as every business plan involves a certain level of risk. Sometimes the emotion and the commitment for the correct operation can cloud the conversations and avoid touching the point of what the investor should expect and even how long it will take to obtain results.

4. Ask for the minimum and not the maximum 

Every entrepreneur likes to have a million dollars in funding to “get it right” and build the company of our dreams. However, you must be aware that your chances of finding someone who will give you a lot to start with are minimal. It is better to start working with some money and start developing the project for three or four months and show what you can do, and then later ask for more.

5. Have a solid business plan

Whether you’re asking your best friend or going to the Bank of Mom and Dad, you need to treat the discussion like you would with a banker. You wouldn’t get a bank loan without a business plan, and you shouldn’t expect your family and friends to invest in your company without one either. Your business plan should include your financials, milestones, and metrics that make it clear how you plan to make your venture profitable.

6. Honor your commitments

Once you have an executed financing agreement, follow it to the dot without exception. Meet all contractual expectations and make all loan payments on time.

7. Provide regular updates

Consider providing your investors with a regular update on your business. You will have to keep them up to date anyway, so it’s best if you formalize this process. Use a prearranged schedule, such as every quarter or twice a year. Formalizing this step also helps ensure that you give each and every investor the same information.