Borrowing Money Inexpensively

by Neal Frankle, CFP ®

If you can avoid borrowing money you should do so. But sometimes it can’t be helped. The good news is that if you must borrow money you can do so quickly and inexpensively. Don’t lean on your plastic for extra cash. There are a number of great credit card alternatives. Also, the banks can be a royal pain to work with these days. And don’t tap your IRAs for funding either. It’s far too dangerous. I believe you can get cheaper and faster money by thinking outside the box.

Believe it or not, your best source is friends and family. I know you might balk at this, but before you move on to the next idea, stop and consider. Even though you may not want to ask people you know to invest in you, understand that it’s not a new idea. Friends financed friends before there were banks, credit cards or loan sharks.

Your friends and family may want to loan you money because they respect you, want to encourage you and want to make a good return on their money. But before you speak with them, understand what their real concerns are.

I recently read that 42% of the money that people use to start a small business comes from close family members. And another 40% comes from friends and neighbors. The message is clear: if you have a good opportunity, your family and friends want a piece of it. If you’re not in business, start thinking of yourself as being in the business of YOU, Inc.

How do you get your friends and family to start writing those checks?

1. Play Favorites

Make a list of all your friends and family. Make notes next to each person’s name. Does she trust you? Does she make investments like these? Does she have the resources to make this investment? Would she be comfortable with this kind of risk?

The longer the list, the better the prospects are to fund your business. Think outside the box. Remember, you’re not asking for a favor. You’re presenting an opportunity.

2. Become a Boy Scout

By this I mean to be prepared. Have a written plan showing exactly what the expected cash flows are going to be and (most important) how you’re going to pay back the lenders.

Make sure that the return you offer is competitive. Right now, that’s not very hard to do. The banks are paying close to nothing and everyone on your investor list knows it. They’re dying to hear about a solid opportunity to earn 5% or more. If you can show that you are solid, you should have no problem getting people interested in earning 5% to 8%. Anything above that level will make people think you are desperate.

Remember one thing: Don’t approach anyone until you have your debt payment plan worked out and are familiar with market interest rates. If that plan includes you taking weekend jobs until you repay the debt, put it down on your proposal. If you have an attractive credit score, show your investors to prove you mean business. (You can get a free credit report with no credit card and without signing up for “free trials.”)

Neal’s Notes:  Are you sure that it’s better to borrow than to pay cash?  Sometimes the answer isn’t so clear-cut.

3. The Approach

Be direct but have no expectations. Call your friends. Do not send an e-mail.

Let your friends and family know what you are up to. Tell them why you are borrowing money and what you need. Tell them why you think it’s a great investment for them. Don’t present it as if it’s a favor and don’t expect any favors. If the loan isn’t a good solid deal for your investors, rework your plan until it is.

I suggest you practice a few times with your spouse. Actually pick up the phone and call him. Ask him to pretend he’s your Aunt Melanie. Go through the conversation a few times and get your husband to provide honest and brutal feedback.

  • What did he like about what you said?
  • What turned him off?
  • What motivated him to want to write you a check?

After you’ve perfected the call on your spouse, try it one more time with a close friend who has no money. Go through the same exercise and get more feedback. After she tells you that she loves the presentation, ask her who she knows who might be interested in the opportunity.

Have your friends and family ever invested in you? How did you approach them? What worked best?



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