Segment 6 - Borrowing from Friends & Family
Borrowing from friends and family members, it can be a good thing, or it could be a really bad thing that will forever wreck thanksgiving day forever. When do you go to family members who can remember just like you family members can invest their cash in the form of equity, which we're going to really dive into in upcoming segments? Or they could be a source of borrowing money? So maybe that other option is going to friends and family members for a loan for your business, so let's start out with how to make it a good working relationship. When might it make sense to turn to them first? Remember the chart of how long you're going to need their money? How long does it take for you to turn over a pest immer if it is a long period of time? Don't mislead your friends and family members that it's really a short time? I really believe in karma in business, and I've seen it in a strange way where if I'm working with struggling entrepreneurs and they've kind of snickered friends and family memb...
ers by not really telling them the real deal, for some reason, I see that they have more, more troubles, right? I believe with your lenders, your investors, he had friends from family members or complete strangers, everything great, awesome partnership starts with being honest. Not misleading them that you pay them back tomorrow or next month when there's no way you can so that's a starting point, what cash you need and for how long should be a part of that discussion with your friend and family member? Otherwise you're going to start ignoring them, you're not going to show it, but thanksgiving, they're gonna ask, so you tell them and add in some extra time, say, you know, I'm not sure I know when I can pay back here is what I'm going to use the money for, treat them with respect, and they will trust you more kind of if you're not telling the full story, the rial dale, they're going to voice a whole lot more their dissatisfaction and approval, and add a whole lot of stress to your life that you don't need as a business owner, the pros. Obviously, if you can pan back, they're probably not going to come in and take away your house or your couch like other lenders when you've signed on the dotted line. I do believe that friends and family members really want you to succeed the reason why they're giving you money or investing in your company is so that you succeed, gosh, that's a great thing, that's a great thing, I get so many letters on the console that sometimes if you're borrowing money from friends and family members that they can't afford to lose or be out of for some period of time, don't go there don't go to them, you know you need that emotional support to support you when the customers giving you imagine up, right? But don't go there, especially in light of all the different resource is for cash that we're opening up in these workshops it's truly not working if they can't afford to lose it, don't ask for go elsewhere because there are other sources for you one very common thing, since we're emphasizing depth, especially if you have a big idea and I find this in the tech community all the time where a technologist will go and borrow five thousand ten thousand dollars whatever from their friends from family members, it's, even extended family members have money coming in from india and here's what they say as soon I'm about to go raise money from angels or venture capital funds, I have the coolest idea and they could be sitting on amazing opportunity where they are great candidates to get outside investor funding outside investors will not pay your friends and family members loans ever, ever, ever, ever why they want their money going to buy more customers, build more products what they will say to you, so if you're thinking about your big idea and borrowing money from your friends and family members and saying as soon as I get investors, I'll pay you back I'm saying no so what will happen six months or a year from now? You will be in this situation where you have to call up your friend and family member and say the investors are saying no, they won't let me do it they want you to sign this document that converts your loan into equity immediately that's their trio terms so they're not even going to trust the ceo that g a million dollars hits their checking account and then I'll pay you back no as a condition of closing the vcs an angel investment clubs will say our money does not go in until we have a signed document converting that loan agreement. And by the way, if you've lent money your business the same thing document converting that into equity as a condition of investment. So this is the wrinkle that is most likely going toe upset thanksgiving dinner wow and that's kind of a black and white I have never heard of a situation for seed in early stage companies where that has not been a condition of closing and and there's more at what price do you think that converts here's what I would ask for the same deal terms as the investors? The investors may say I'm just convert to common stock now in an upcoming section and in some of the bonus materials we're going to dive much deeper into this but because we're here and I know there are people in our audience who have taken money and from friends and family members in the form of debt and are hoping investors will pay that off they'll probably the investors will suggest convert into common stock which you should ask for is to convert this there investment under this same deal terms as the investors you don't ask you don't get the investors are going to have a better deal so why not ask for the conversion under the identical same deal terms is the investors it will be the best thing for your friends and family members questions about this does that actually ever happen yeah yeah yeah and actually there are some very smart angel investors that do provide depth and no that's coming but one thing you know we'll want to convert under the deal terms of the next round it's likely to be the better round and you know it's it's a reasonable request it's fair so most investors most sophisticated investors they are fair people they may offer this because it's finally to their advantage not tio but they will allow it especially since if they're negotiating deal terms they do want to keep the entrepreneur reasonably happy because let's face it we're investing in you you better be happy and working hard but that's the big wrinkle if you think the payoff for your friends and family is going to be investors I'm saying that's not gonna happen really world not goingto happen you've made a big promise to possibly friends and family members who can't afford not to get that money back if they provide money it's likely they won't get their money back until you sell your company at the same time you come out and the investors come out hopefully with big profit right? So converting inequity may not be a bad thing but it is a bad thing if your friends and family members can avoid afford it to be without it you know should you be asking your grandmother who's on a pension and you know day today for money probably not find money elsewhere live well, karmically you know questions about that yeah, we have a question here from tammy and they want to know is it possible to formalize alone from friends and family in a way that it will not that it's not subordinate to future lenders um no no here's why um in future land and it could be a bank um or an investor they will make it a condition of closing so you're gonna have to shop really hard to find that next round, right? But I think about work arounds right? So just because I said no and the investor may say no you are now in a second position then they not be such a bad thing but why not carve out with that position my big so some ways around it especially I'm assuming that this company is has customers and it's selling right now but they can chime in on that um where you khun structure agreements where security is released based on company progress so in what no we're talking about the collateral and security who has the first rights or the first call let's say andrew's business okay I went to her website before this workshop we checked everybody out and saw some amazing furniture pieces amazing beautiful ok so let's say she now wants and I do appreciate their one of a kind but just two for the example will say you make one hundred of one I know it's not your design but we're now making one hundred or a thousand of these unbelievable umm tables right she needs a bank loan to fund the inventory and maybe the receivables and she has a good sense of who's she's selling them to maybe it's bloomingdale's all right all around the world okay there's some things we can dio instead of having a blanket security over all of your assets forever and ever and then your first loan subordinate to that if she is a million dollar loan maybe she agrees with that lender that she has they have a first position on the first million or two million so we more than adequately covers the lone obligation and then allows more available for those lenders in a second position. So it's up tio andrea to start thinking creatively, which we are all creative people right to work with that next lender to recognize they will want a first position, certainly on every dollar that is outstanding, they give you a million dollar loan. They're gonna want more than a million dollars worth of assets from your receivables in inventory, but do they need five million dollars of coverage? How so? This is where you can start to negotiate something fair and reasonable, but in answer to the question, you will be second unless you find another friend and family member who's willing to be number two, but I'm assuming that we're now dealing with finance companies or s p a back lenders and so forth here's the way to think of it and this is how investors think to the last money in his preference because you needed that money. Same thing with investors the last money in first money out last dead in first ed out, because why would a new lender negotiate less? So when we're thinking about what's, the attitude and approach know that going in, okay, there, you want to be first out, so how do you now create a reasonable structure? I do want to say it's in an upcoming segment the espy a just made an announcement that they're loosening some of these restricts shins in the next two weeks that allows broader protections for second in position loans that just came out in the press release last week. More questions just very quick clarifications susan's you revised that if you are getting a family loan, you should have your investors match that loan. Is that your advice? No, no, no, no, no I'm sorry if I've misled anybody, you can turn to friends and family to you can borrow money from them or take their money in and invest in your company in one case they own a piece of percentage of your business if they invest in your company or you can borrow money from them now you may that may be enough. You may not need more to go to outsiders and strangers for your business, but I don't want you thinking that way from day one because remember you're the mixologists you're dead and equity your mixes should changed over time based on what's the lowest cost source of money for where you want to go and as you build and grow, I guarantee you may outgrow that you don't have to have investors but all I am saying is if you were taking money in from your friends and family members as alone don't promise them that investors down the road will be the ones to pay it back chances are they're going to say no they may say yes to investing in your company, but they don't want their cash to go to pay off old loans by the way, s p a loans are not allowed to be used to pay off old loans it's got to be business building way because they see your balance she right? So a balance she is a listing of all of your company's assets and liabilities, so they're going to ask you who asked you owe money to and by the way, a lot of this especially if they have if you are securing and putting up collateral for alone and they're going to file what's called a ucc statement taking a first position on that collateral so it's online documents you can tell who is a security position in different of your company assets so it's available it's not too hard to find that's how they know ok, well, we've covered some of this right here on and I want to know if anybody was asking for money from parents um this goes to your question purposeful way this is up to you if you're going to borrow money or ask for money from investors, I want you to spend it on things that come back to you in something more and earlier on I said tell me how much money you want a thousand dollars five thousand dollars you pick a number but then the next step in doing that is, um I using it well, a lot of times the first chunk of cash people get from lenders or investors is blown on stuff that doesn't bring back a customer you waste your cash so that's why? You know I'm susan start on purpose you start every initiative with a really purpose and then you do it with precision I want whatever you borrow or get it from investors to reward you it's not an expense whenever you spend money I want you to think of it as you're investing in your business and I want you to set a high marks and hot in a high bar on what you get back for it you know it's very easy to spend a lot of money and marketing and not get a certain any new customers are you coming up with new products or services that is really going to expand your business the customers want or you doing something that would just be fun to d'oh it's the difference between people who become super successful and those or not? I will say that what powers everything I d'oh is a passion and knowledge that business owners were successful have net worse that air three times their soured counterparts in america women especially it is the fastest route to women earning incomes over one hundred thousand dollars a year that's why I am so passionate about teaching this the cash you get from lenders or investors can really be life changing for you and your family because you can make more money and then own a lot more and this is the way to make that happen coming up in the next segment if we don't have any questions but I love questions wait did have one come in and you may be touching on this in future segments about credit score and cashes clay I just want to know what type of general credit score would you need for an espy alone? Is there a good rule of thumb or ballpark? Yes and we're going to go be going over in an upcoming segment that there are many different kinds of s p a loans all right and in general um seven hundred is a great number but you don't necessarily have to have seven hundred. You can have six hundred and qualify for a business loan here's some wrinkles if you're going into business with business partners it's good to be aware of unfortunately, sometimes you go into business with your best friend, but if they have monster bounced her bad credit g it may water down your future loan applications it better maybe don't make them an officer of your company all right, so some planning is involved. I would say this. Your credit score is not the number one determinant of whether or not you get an s b a loan or a loan from any other kinds of finance companies in america. It's, not the number one determinant. It's. A factor. They will ask for it in the early years of your business. Once your company is profitable and growing and growing, it becomes far, far less important. And, quite frankly, you know, my mission is as your business grows, I want you two get away from all personal guarantees and negotiate them away. So they're not asking for your credit score where your social security number ever again.