You may have heard that borrowing money from family and friends to start a business is a bad idea. Still, the fact of the matter is that many entrepreneurs have gotten their start this way leading to the founding of many well-known brands.
For example, entrepreneur Jim Casey started the business that today is UPS way back in 1907 with a family loan of just $100.
Sam Walton, legendary founder of the WalMart chain, borrowed even more — $20,000 — from his father-in-law to open his first store.
Finally, John Mackey and Renee Lawson, who would together go on to found the popular Whole Foods store and brand, would do so with a $45,000 loan from family and friends back in 1978.
A Sunnyvale, Cal. startup called TrustLeaf is attempting to simplify the method by which entrepreneurs can approach family and friends for loans.
For a fee, depending upon the type and complexity of the campaign, TrustLeaf allows you to invite family and friends to pledge financial support for a business venture. The site says it offers standard online agreements for repayment of loans, then manages the loans and keeps track of repayments while tracking your progress.
According to the company, 38 percent of the estimated 6 million small businesses started annually in the U.S. begin with funding from friends and family.
In a recent release, the company explains:
“Friend and family loans provide many potential advantages over traditional forms of investment. They may be available when other capital is not, are often cheaper, offer greater flexibility, and perhaps most importantly, represents validation from key supporters. Many entrepreneurs, however, hesitate to take out loans from friends and family, fearing that it may damage their relationship.”
The key to avoiding these potential problems is to manage personal loans responsibly, the company claims.
TrustLeaf also recently released a free Friends & Family Loans Guide. The 19-page ebook recounts the examples of great entrepreneurs and great brands including those listed above that started out thanks to funding from family and friends. But it also provides tips on avoiding awkwardness while approaching family and friends about a business loan.
Finally, the ebook includes suggestions on the ideal interest rates for personal loans and the creation of the necessary documentation to keep track of personal loans and avoid misunderstandings between friends or family members about the rates or other details of repayment.
Personal loans from friends and family may be an option entrepreneurs need to consider when other funding opportunities are scarce.
TrustLeaf hopes to provide services for those entrepreneurs who may need a source of funding from investors who already know and trust them.