How to borrow money from family and friends
A national survey conducted by Fundable concluded that about 38% of startups relied on initial monetary funding and starting capital from friends or family. The National Association of Realtors has also found that about 52% of first-time homebuyers also sought financial help from their parents, extended family members, or friends to help purchase their first house. If you are also thinking of lending money from your family or friends for any of the mentioned or other purposes, this is your complete guide to approach the process in the right way.
1. Start by presenting your case
Like the procedure followed in borrowing money from a bank where you are required to fill out forms and explain your entire financial situation, your first step should be preparing a short elevator pitch for your family or other potential lenders to understand your current financial standing better. You should include details like why you need that certain amount of money, how you will use it and how long it can take you to repay the loan.
2. Set up terms for repayment
You need to break down the repayment plan and communicate it clearly to your loved ones to increase their confidence in your ability to repay the loan. You should include a detailed explanation about the start date of your repayment, monthly due dates, and the date when you expect to fully repay the loan. To add to the credibility of your word, you can even show your monthly household budget and how the loan payments can be easily affordable for you.
3. Create a backup for your repayment plan
There is a chance that you would not be able to repay the loan on the agreed schedule. You should create a backup plan in case you are not able to repay on time. You can set a late fee amount and promise to offer it in case you fall behind on your payment deadlines. The late fee can increase with time. If you have to show that you are committed to repaying your loan, you should offer the collateral to gain confidence. You can give a valuable item like jewelry or an affidavit to make your case more credible.
4. Sign a legal agreement
All these details that have been discussed between you and your family or friends should be written down in the form of an agreement, and both you and the lender need to sign it before the transfer of the funds. A loan agreement between friends must be signed, and both parties should have a copy of the agreement for future reference. This will prevent any misunderstanding, communication gaps, and conflicts in the future.
5. Set up recurring transfers
Most banks and fintech allow you to set up recurring transfers or direct debit that help you make timely payments without having to remember the dates. When the period of your repayment period begins, the bank will automatically make a monthly transfer to the lender’s bank account. This will ensure that you make timely installment payments to the lender and avoid any potential delays to protect the trust and relationship with the lender.
It is important to take steps to ensure that unclear terms or late repayment do not get in the way of your relationship with the lender, and loaning money from friends and family does not come with guilt or conflict.