About Friends and Family Business Loans
Want to know who your real friends are? Ask them to invest in your business… All kidding aside, for a lot of businesses a Friends & Family Business Loan may be the perfect option, especially if the business owner is not looking to give up any equity in the company.
One Degree Capital has a program designed specifically to facilitate Friends & Family Business Loans. We can help with the paperwork, payment schedules, and even contribute a portion of the loan in some cases. For example, if a business owner needs $100,000 to complete a project, but only has a willing participant to lend them $50,000, on approved credit One Degree Capital will hold the $50,000 from the friend or family member and disburse $100,000 to the business owner. The business owner will make monthly payments to One Degree Capital and One Degree Capital will make monthly payment to the investor. It is important to keep the transaction as professional as possible to ensure all parties involved are protected.
One Degree Capital recommends being as prepared as possible before discussing the opportunity with any potential investors. Having all of your financials and information on hand will not only greatly increase the potential investor’s comfort level, but also make the process move along much quicker.
Have readily available:
- Your plan for how the funds will be used. If purchasing equipment or paying for services, have quotes from vendors. If borrowing for inventory purchases or operating expenses have a detailed explanation of where the funds will be going.
- Your company financials. At the minimum have your current Profit & Loss and Balance sheets – make sure the information you are presenting is accurate. Messy books can quickly turn off any potential investor.
- Your business bank statements.
- A loan structure and repayment plan. Already have the term, interest, and payment schedule drawn out.
- A recent credit report for all business owners.
Benefits of Friends and Family Business Loans
Flexibility – Friends and Family Business Loans can be quite flexible in regards to collateral, requirements, and terms.
Term – We suggest keeping terms as short as possible without being detrimental to cash flow, but with Friends & Family Loans you and the lending party are in the driver’s seat on this detail.
Interest Rate – Friends & Family Loans typically have lower interest rates than traditional financing options.
Credit Reporting – Friends & Family Business Loans often won’t report to your personal credit.
Drawbacks of Friends & Family Business Loans
Potential to harm personal relationships – Sometimes mixing business and family can have a similar result to oil and water. It is important in this situation to keep the transaction as professional as possible and treat the loan as you would any other business liability.
The requirements for a Friends & Family Business Loan are dependent upon what you and your potential investor agree upon.
Ownership – All owners with 10% or greater ownership will typically be required to be a personal guarantor
Bureau Scores – Personal Credit of at least 600 for the most qualified guarantor
Major Derogatories – Bureau reports stating open tax lien and judgements, unpaid collection accounts, and charge-offs/repossession may limit the applicant’s financing options.