Guide to Lending Money

For example, experts don't recommend investing in a new girlfriend's or boyfriend's business, since problems with the relationship down the road may affect the repayment plan.

Be confident in the business. Do the proper research by reviewing the business plan, enlisting an expert if you're not certain how to evaluate the paperwork. Also, many public libraries offer free resource centers.

It also helps to know whether any banks have offered the business funding already. Make sure the friend or relative is also investing a substantial chunk of his or her own money into the business. If they've got something to lose, they'll probably take the business more seriously.

Rules of the Trade

A simple handshake won't suffice. Minimize risk and get the agreement in writing through either a promissory note (they're available online) or by working with loan facilitators, such as CircleLending, where agents create a business agreement between two parties and help service the payment.

The Campos brothers are managing all eight of their family-and-friend loans with the firm. It costs $199 for documentation and $9 for each loan payment. CircleLending boasts an overall default rate of less than 5%.

The terms of any agreement should include a repayment schedule, the interest rate and a grace period.

"Talk over in advance what you're going to do if a payment is late," says Jim Smith, vice president of marketing and sales at CircleLending. He also recommends spreading out the repayments, as opposed to getting one lump sum back in three years. "Few small-business owners have the discipline" to pay a lump sum, Smith says.