Borrowing from Friends and Family Tap into this popular source of startup financing.

Your own resources may not be enough to give you the capital you need to start your own business. After self-financing, the second most popular source for startup money is composed of friends, relatives and business associates.

In fact, "most businesses are started with money from four or five different sources," says Mike McKeever, author of How to Write a Business Plan.

"Family and friends are great sources of financing," says Tonia Papke, president and founder of MDI Consulting. "These people know you have integrity and will grant you a loan based on the strength of your character."

It makes sense. People with whom you have close relationships know you are reliable and competent, so there should be no problem in asking for a loan, right? Keep in mind, however, that asking for financial help isn't the same as borrowing the car. While squeezing money out of family and friends may seem an easy alternative to dealing with bankers, it can actually be a much more delicate situation. Papke warns that your family members or friends may think lending you money gives them license to meddle. "And if the business fails," she says, "the issue of paying the money back can be a problem, putting the whole relationship in jeopardy."

The bottom line, says McKeever, is that "whenever you put money into a relationship that involves either friendship or love, it gets very complicated." Fortunately, there are ways to work out the details and make the business relationship advantageous for all parties involved. If you handle the situation correctly and tactfully, you may gain more than finances for your business--you may end up strengthening the personal relationship as well.

The Right Source

The first step in getting financing from friends or family is finding the right person to borrow money from. As you search for potential lenders or investors, don't enlist people with ulterior motives. "It's not a good idea to take money from a person if it's given with emotional strings," says McKeever. "For example, avoid borrowing from relatives or friends who have the attitude of 'I'll give you the money, but I want you to pay extra attention to me.' "

Once you determine whom you'd like to borrow money from, approach the person initially in an informal situation. Simply let the person know a little about your business and gauge his or her interest. If the person seems interested and says he or she would like more information about the business, make an appointment to meet with them in a professional atmosphere. "This makes it clear that the subject of discussion will be your business and their interest in it," says McKeever. "You may secure their initial interest in a casual setting, but to go beyond that, you have to make an extra effort. You should do a formal sales presentation, and make sure the person has all the facts." A large part of informing this person is compiling a business plan, which you should bring to our meeting. Explain the plan in detail and do the presentation just as you would in front of a banker or other investor. Your goal is to get the other person on your side and make him or her as excited as you are about the possibilities of your business.

During your meeting-and, in fact, whenever you discuss a loan-try to separate the personal from the business as much as possible. Difficult as this may sound, it's critical to the health of your relationship. "It's important to treat the lender formally, explaining your business plan in detail rather than casually passing it off with an 'if you love me, you'll give me the money' attitude," says McKeever.

Be prepared to accept rejection gracefully. "Don't pile on the emotional pressure-emphasize that you'd like this to be strictly a business decision for them," says McKeever. "If relatives or friends feel they can turn you down without offending you, they're more likely to invest. Give them an out."

From Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the staff of Entrepreneur Magazine (Entrepreneur Press)