Borrowing from the family: get it in writing, even from mom.

AuthorOstermiller, Pamela
PositionEntrepreneurEdge

It was 1984 and tanning salons were popping up in strip malls across America, when a family member of mine decided to jump on the trend. The idea was great, the timing was perfect and the location was prime, right across the street from Utah County's only mall. The problem was lack of financing and the only resource at the time was family.

After hearing all the pros (and not very many cons, evidently), a few relatives pitched in. Less than a year later, for reasons still unmentionable at the dinner table, the business failed and investments were lost, along with valued relationships. If only the situation had been based on a little more communication, everyone could have been spared some angst and resentment.

Fortunately, there are ways to borrow money from friends or family for your startup while maintaining peaceful Sunday suppers.

For many, this type of funding is the sole option. "Let me just start by saying--and we do a fair amount of this type of work, helping young companies get funded--that I would never discourage anyone from getting money from family members for their business," says David Rudd, a partner in the Business and Finance Department of the law firm Ballard Spahr in Salt Lake City. "It's how some of the most successful companies get started."

See the Big Picture

Rudd says the key to success is to start with clear expectations. "The problem with a lot of entrepreneurs is that they think they have invented the new mousetrap. They don't focus on the risks, problems and downsides."

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You need to do your homework before you leave the gates. "Know the market, your competitors, proprietary position and future funding requirements," Rudd says. "Nothing's worse than finding out later that the market isn't big enough to attract enough business."

The next step is to identify your sources, the players or the Five Fs: "Friends, Family, Fools and Former Friends," says Kent Thomas of CFO Solutions.

Evaluate who in these categories you would really want in the middle of your business. You can't have former family, Thomas says, so ask yourself, do you really want Uncle Bob dropping by for monthly sales meetings? Do you trust your...

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