The Borrowing Tree

Graduation parties, where giving cash and checks are a way to celebrate the accomplishments of high school and college seniors, may be filling your calendar this month. Generosity also comes with other major milestones, such as a wedding or baby shower.

But when someone starts a small business or decides to expand, there’s no traditional “business on the way” showers or luncheons for the blushing business owner.

Some entrepreneurs, however, are turning to friends and family for financial assistance, as they face continued difficulty in attaining financing from banks.

Assistance with this type of lending is one of the most requested services start-up companies are seeking, says Harry Looknanan Jr., certified business analyst at the Small Business Development Center at Florida Gulf Coast University. He says it’s been on the rise since 2008, when banks turned off the spigot for funding, which businesses need to open, buy equipment, expand or renovate a location, and even cover payroll.

“When a client asks me, ‘Where do I get money?’ the friends and family program is where most of them start,” he says.

Another option some businesses consider is peer-to-peer lending, where they pay a fee to be matched with potential lenders or investors (sites that offer this include prosper.com and microventures.com).

If you’re asking folks you know for money, there are reasons to be cautious and steps to take to show friends and family their gifts or loans are being put to the best use possible.

Write down expectations.

When someone gives to your company, distinct expectations between the entrepreneur and their friends and family need to be put in writing. “Most of the time what happens is they receive money and they’re friends and family today, and when the business goes bust, they have no more friends and family,” Looknanan says. “The friends and family need to understand that this is a high-risk venture and they may not get their money back.”