Small Business

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Financing Your
Small Business
First Edition
How to Borrow Money
from People You Know
Prepared by:

Lending SM
Based in Cambridge, MA, CircleLending, Inc. is a rapidly growing financial services company uniquely serving
the needs of the interpersonal lending market in the United States. The company offers a suite of services
(geared for small businesses) that provide for any combination of: loan documentation, electronic billing,
payment processing, loan security recording, and loan account services to facilitate transactions between
private parties.
CircleLending is widely regarded as the nation's first company to provide a complete solution to reduce the
financial and emotional risks associated with loans between relatives, friends, and other private parties. The
company has been profiled in Time, Inc., and Entrepreneur magazines, The Washington Post and The Wall
Street Journal, and has also been highlighted on CNN financial network and National Public Radio (NPR).
For more information, visit
The SCORE Association, headquartered in Washington, D.C., is a nonprofit association dedicated to the
entrepreneurial education and the formation, growth, and success of small businesses nationwide.
SCORE's 10,500 retired and working volunteers provide free business counseling and advice as a public
service. From marketing advice to finances, sales and operations, SCORE counselors will help you find the
answers. Just as important, counselors will help you develop and think through your business plan to make
sure you're asking the right questions.
When you seek help from a SCORE business counselor, you get the benefit of all his or her ideas–and the
continuity of knowing that someone who knows and understands your small business is available for ongoing
support. Seeking advice from a SCORE counselor provides a distinct advantage as you go forward. SCORE is
a resource partner with the U.S. Small Business Administration (SBA).
For more information, visit
The material in this workbook is based on work supported by the U.S. Small Business Administration (SBA) under cooperative agreement number SBAHQ-
04-S-0001. Any opinions, findings, and conclusions or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect
the views of the SBA.
These materials are provided for informational purposes only and use of these materials does not guarantee that you will be able to obtain financing.
CircleLending is not a lending institution nor does it provide legal advice. The information contained herein is accurate as of the time of publishing. It is the
sole property of CircleLending, Inc. and the SCORE Association, and shall not be reproduced or redistributed for any purpose without the express written
consent of CircleLending, Inc. and/or the SCORE Association.
These materials are not intended to replace the advice of legal or financial professionals. You should consult with an attorney before entering into any
agreement or contract. All Rights Reserved Copyright © 2003

Table of
Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Message to Our Readers
1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt vs. Equity Financing
2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Concerns of Small Business Borrowers
3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thinking like a Lender
4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determining Who to Approach for Money
5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Elements of a Strong Loan Proposal
6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overcoming Common Lender Objections
7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Worksheet A: Create List of Potential Lenders
Worksheet B: Determine Start-up/Expansion Costs
Worksheet C: Create Collateral List
Sample Unsecured Promissory Note
Sample Secured Promissory Note
Loan Type Options Chart
Did you know?
Sample Payment Schedule
Family and friends can be a good
> source of financing, especially in the
early stage of your business when
relatively small amounts of money
are involved.

Message to Our Readers
Whether you are just starting out or looking to expand, financing is an essential part of any
small business. Proper financing can mean the difference between success and failure.
According to the Global Entrepreneurship Monitor, U.S. start-ups and growing businesses
receive more than $129 billion from informal sources–this includes money that comes from
family, friends, and other private parties.
To successfully borrow money from people you know, it is important that you overcome:
1. Financial Risk: You must demonstrate to people who might be potential lenders that your business has a
reasonable chance of success, and that their investment in it is a smart one. Lenders will want to see that
you have the necessary skills, have thought about the risks involved and have a plan in place to minimize
these risks while growing your business.
2. Emotional Risk: You must convince people who might be potential lenders that investing in your business will
not jeopardize their relationship with you. The information, worksheets, and examples contained in this docu-
ment will help you to overcome this barrier, and bring you closer to getting the money you need.
When it comes to borrowing money from people you know, we realize that small business owners will be at
different points in the process–some of you may be uncertain as to where or how to begin, while others may
already have specific lenders in mind. This guide is organized so you can select the appropriate section(s) based
on your individual situation and specific business needs.
Should you have any questions, please feel free to contact CircleLending at 1.800.805.2472 or visit us online at:
Asheesh Advani
CircleLending, Inc.

Section 1
Debt vs. Equity Financing
Although this guide focuses on how to borrow money from people you know, it is still
important to understand the types of financing that are available to small business owners.
This way, you can determine which type, or combination of types, makes sense for your
situation. After all, it is not uncommon for small business owners to receive financing from
several sources, one of which is usually friends, family, and other private parties.
Debt Financing is money that you will pay back,
Because equity investors are buying a piece of your
usually with interest, over a set time period and in
business and essentially becoming joint owners, if the
accordance with specific terms. Some traditional
business fails you generally are not obligated to pay
sources for debt financing are banks and credit cards.
the money back. On the other hand, if the business
succeeds, equity investors share in the financial
There are also numerous programs offered by federal,
success well beyond recouping the money they
state, and local governments that hope to encourage
originally invested into the business.
the growth of small businesses because of the
positive effects they have on the economy.
Common sources of equity funding:
• Venture Capitalists: professional investors who are
Another source for debt financing is borrowing from
looking for a higher rate of return by investing in
people you know, such as family, friends, and busi-
high-growth business ventures
ness associates. Many of today's successful compa-
nies, including Motown Records and Crate & Barrel,
• Angel Investors: high net worth individuals who
started out this way.
invest in businesses on a private basis
Equity Financing involves giving up a portion of the
Did you know?
ownership of your business in exchange for money
received from equity investors.
Businesses in existence for less than two
> years typically find it difficult to get loans
from commercial lenders because the
businesses are viewed as a high credit risk.
Debt vs. Equity Financing: Pros & Cons
Debt Financing
Equity Financing:
- Typically easier to get than equity financing
- Investors can provide expertise and key contacts
- Wide range of options available (e.g., bank loans, lines
- Usually available in larger amounts than debt financing
of credit, family and friend loans, etc.)
- If business fails, you usually don't have to pay back
- Allows you to retain control of your business
the money
- Collateral is sometimes required
- Investors may demand a say in running your business
- Amount you can borrow is usually limited
- Requires additional time to manage investor expectations
- If business fails, you still may have to pay back
- You forfeit sole ownership of the business and its profits
the money

Section 2
Common Concerns of Small Business Borrowers
While family and friends can be an excellent potential source of financing
for your business, as a borrower you may still have some concerns about
mixing money with people you know. You are not alone.
Below we have listed the top concerns of small business borrowers that
we have identified based on our experience. Underneath each concern we
have provided a rationale that should help ease your worry.
1) Borrower concern: "I am worried lenders will meddle in how I run my business."
How to minimize this concern: By formalizing the loan through proper documentation you will make it
clear that this is indeed a loan, and not a favor, which means your lender's role does not extend beyond just
that–a lender.
2) Borrower concern: "I'm concerned that my lender will scrutinize everything I do financially that isn't related
to the business. For example, if I take a vacation will they wonder if I'm doing it with their money?"
How to minimize this concern: By setting up a mutally agreed upon repayment plan, your lender will know
that you are serious about paying back the loan. Because they will be receiving steady payments, any
concerns they might have about how you are spending money should be alleviated.
3) Borrower concern: "Won’t my lender worry about my business failing?"
How to minimize this concern: Yes, that is a risk they’re made aware of. However, if you secure your loan
with collateral, your lender's risk is significantly reduced. In the event that you default on the loan, your
lender will be entitled to receive something (e.g., a vehicle, office equipment, etc.) in lieu of being repaid.
4) Borrower concern: "Even after I pay my lender back, are they going to feel as though they did me a favor,
and that I still owe them something?"
How to minimize this concern: By talking to your lender up front and formalizing the loan process, you
make it clear that this is a business opportunity, not a favor. By making sure they know that all you owe them
is the amount of money borrowed plus interest, you will prevent them from holding the loan over your head
in the future.
5) Borrower concern: "What if I have trouble paying back the loan?
How to minimize this concern: Generally, when you borrow from friends and family, you have more
flexibility (compared with a commercial lender) in how you pay back the loan. If you are having difficulty
making payments, be upfront with your lender about your situation, then suggest an alternative repayment
plan that works for both of you. In most cases, your lender will appreciate your proactive response and
accommodate your request.
Did you know?
Many times, family-and-friend loans are often
> modified to be more affordable midway
through the repayment term.

Section 3
Thinking like a Lender
Before you approach someone you know for money, you should first understand the typical
loan approval thought process of a traditional lender, such as a bank. This is important for
two reasons:
> The person you approach for money may follow a similar thought process, and you will need
to provide the necessary information just like you would to a traditional lender.
> Even if the person you approach doesn't follow this thought process, by providing some or
all of this information you are demonstrating your business knowledge and professionalism,
both of which can increase your chances of obtaining the money you need.
The typical loan approval
5. Personal Character. In addition to
thought process:
your experience, lenders also try to
understand who you are as a person.
1. Management Experience &
As a result, some lenders will
Expertise. Lenders need to feel
conduct background checks that
comfortable that a borrower has the
can include looking for any previous
necessary background and skill set to
litigation or bankruptcy information.
effectively operate the small business.
6. Credit History. Lenders like to
2. Detailed Business Plan.
see a good credit history. If there are
Lenders usually require start-up businesses
any credit issues, an explanation will be
to have a business plan that includes
required. Different lenders have different levels of
income and expense projections for the first three
tolerance when it comes to credit issues.
years of operation.
7. Personal Financial Statements. Lenders
3. Cash Injection.
like to see a list of personal assets and personal
Lenders want to know how much money the borrow-
liabilities. Do not include debt paid by your business.
er has at risk. For start-up businesses, commercial
Include other sources of personal income.
lenders typically require at least a third of the total
project costs to be covered by the borrower.
Did you know?
4. Collateral. To reduce their risk in case of
Investments by family and friends account
default, lenders often require the borrower to secure
for more than 50 percent of all investment
the loan with collateral. This is usually hard goods
dollars for start-ups.
such as office equipment, vehicles, etc., but some-
times it can be against accounts receivables depend-
ing on the business' current cash flow.

Section 4
Determining Who to Approach for Money
At first, trying to determine who to approach for financing may seem like a challenge.
Many small business borrowers feel they don't know enough people who are in a position
to lend them money, and who they are comfortable approaching.
To formulate a list of potential lenders, consider these helpful steps:
• Write down the names of everyone you know, regardless
of how remote the relationship. This might include family,
Ahmet Ertgun, founder of Atlantic
friends, colleagues, mentors, teachers, neighbors, etc.
Records, borrowed money from his
F family dentist.

• Circle the names of the people who have some insight into
your character and/or personal and business skills.
• Think about a realistic amount of money each person might be able to lend you, and write down that amount
next to their name.
You can use Worksheet A (see Appendix) to develop your own lender list, which should resemble the
sample below.

Target Lender
Target Lender
Jane Smith
Joe Thompson
Pete Williams
Consider borrowing from several peo-
> ple rather than trying to get it all from
one person. This way, you can ask for
an amount from each person based on
what they can afford to give you, and
not on what you need.

Section 5
Elements of a Strong Loan Proposal
When approaching someone you know for money, it is important that you develop a strong
loan proposal that backs up your request with facts and figures. Merely asking for the money is
practically a guarantee that you will be turned down.
Consider the following:
4. Loan Type Options. From start-up business
loans to seasonal loans, the type of loan you propose
1. Financing Overview. Show potential lenders
impacts how you will repay it. Review the Loan Type
exactly how much money your business will require,
Options chart to determine which loan works best for
and tell them what other
your business situation.
sources (if any) you are
5. Payment Schedule. Based on which loan
using to obtain financing.
type you select, review a sample payment schedule to
Use Worksheet B to
show potential lenders how the loan would be repaid.
determine the start-up
Use the Sample Payment Schedule.
and ongoing costs that
your business will incur.
6. Outsourced Loan Servicing. Consider
using a loan servicing company to manage the repay-
2. Legally-Binding
ment process, which includes payment processing
Loan Agreement.
and record keeping. This will reassure your lender that
Let potential lenders review an actual loan agreement.
they won’t have to deal with awkward conversations
Seeing an agreement in writing will show your
that might inhibit your relationship.
commitment and make potential lenders feel
comfortable about giving you the money. Use one
of the Sample Promissory Notes to show them
Did you know?
an example.
Default rates on informal loans drop from 14
3. Collateral List. By identifying items you are
percent to less than 5 percent when a
willing to use as collateral to secure the loan you are
repayment installment plan is used in lieu of
demonstrating that your lender's investment is pro-
a lump sum payment.
tected. If you will be securing your loan with collateral,
use Worksheet C to develop your own collateral list
and review it with your potential lender.

Section 6
Overcoming Common Lender Objections
Potential lenders may object to giving you money for a variety of reasons. Sometimes they
may tell you why, other times they may not. Either way, it is important for you to understand
these objections so you can respond to them appropriately.
Below are four categories of lender objections, as well as suggestions for how
to overcome them:

1) Financing Objections: These objections typically focus on the lender's financial situation.
Lender objection: "I don't have the money to give you."
Suggestion to overcome objection: Consider asking for a lower amount. Try to find out how much money
your lender can afford to give you.
Lender objection: "I can't access the money. It's tied up in an investment, retirement plan, etc."
Suggestion to overcome objection: Encourage your lender to contact their [financial advisor, accountant, etc.]
to find out if they can move the money without being penalized. For example, some retirement accounts and
annuity plans allow money to be lent to a small business without paying a penalty or taxes.
2) Business Risk Objections: These objections typically focus on the lender's perception of your business.
Lender objection: "I don't believe your business will succeed."
Suggestion to overcome objection: Review your business plan with your lender to show them why you
believe the business will succeed. Consider asking your lender for suggestions on what improvements you
could make so they feel more comfortable about your business.
Lender objection: "I don't think you have the skills to run your business."
Suggestion to overcome objection: Emphasize your experience. Talk to your lender about former jobs you've
held that relate to your small business, entrepreneurial classes you have taken, or people you plan on hiring.
3) Relationship Risk Objections: These objections typically focus on the lender's perception of how lend-
ing you money will impact their relationship with you.
Lender objection: "I'm concerned that our relationship will suffer if there's a problem paying back the loan."
Suggestion to overcome objection: Recommend using a loan administration company to manage the
repayment process. This way, there's a buffer between you and the person from whom you borrow.
Lender objection: "What if we disagree over the terms of the loan after the fact?"
Suggestion to overcome objection: Emphasize that everything will be documented in writing, and that
detailed records will be kept–all of which can be handled by a neutral third party.
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