Structure loans from family and friends the right way

For many small businesses, bank loans, venture capital and money from angel investors are financing longshots at best. It is far more common for a small business to secure funds from family members or even friends. In fact, more businesses are started with loans from friends and family than from any other single source. The money comes from aunts and uncles, brothers and sisters, moms and dads, grandparents, in-laws, roommates, mentors, personal lawyers and many others.

Availability is the big draw. The downside is that business loans from family and friends also can be a disaster if they are not done right. Unstructured or loosely structured financing and payback terms can haunt both sides later on. Research shows that 14 percent of business loans from family and friends go into default, compared to about 1 percent for bank loans.

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