How to Turn Your Loved Ones Into Your Business Backers

NEW YORK ( TheStreet) -- While you may not mind asking mom and dad for tuition funds or begging friends to chip in for gas money, asking loved ones to fund your business is a different story.

Even if you're a responsible investor and a wise entrepreneur, money can cause serious problems in relationships. Before you ask a friend or family member for business capital, experts say it's best to go in with a game plan and make sure you treat every investor -- even grandma -- with respect.

"Friends and family are typically the first place people look when they are starting a business, because those are the people who already have faith in you and your abilities," says David Barbash, managing partner at Boston law firm Posternak Blankstein & Lund.

People who have confidence in you will be more likely to contribute to your business, but Barbash cautions that they still need to see a business plan and understand your corporate vision. In other words, treat them like you would any other investor.

"Don't approach them any differently than you would an average investor who you are meeting for the purpose of asking them to invest," he says. "Even though they already believe in you, boost their confidence even more by telling them how you're going to generate revenue, how you plan to grow the business and what your strategies will be. They'll walk away even more excited to help you."

Never assume that prospective investors understand your professional expertise just because they know you -- don't be afraid to tell them stories about your vision for the company and your experience, says Jerry White, director of the Caruth Institute for Entrepreneurship at the Cox School of Business.

"Tell them an interesting story about how you, the entrepreneur, recognized an unfulfilled need, your approach to solving that need and your current plans for making your business viable, including your search for financing," White says. "If they show real interest then that will lead you to be able to discuss execution of the plan."

It's great to go into as many corporate details as possible, but avoid discussing exit strategies or plans to sell the business, says Rohit Arora, co-founder of Biz2Credit, a small-business lending service.

"Don't talk about escape routes if your business doesn't work," Arora says. "Don't talk about what you'll do if you have to sell the business. Talk about what your business will look like in a few years, and what you will do when you become successful."

One thing many entrepreneurs fail to discuss when asking for funding is how much of themselves they are devoting to the business, Arora explains. Investors need to know how much of your life savings, how much time and how much energy you're devoting. When they see how committed you are, they'll be more likely to give you what you're asking for.

When it comes to getting what you need, Arora says to be careful how you start the conversation -- and who you start it with.

"If you open by saying, 'I need money,' people are going to feel alarmed or defensive," he says. "Make people interested instead, even ask for their input. 'What do you think about my idea?' is a great way to get them engaged."

Before you start any conversation, take a hard look at who is sitting across the table from you, Arora says. Ask yourself if they are financially comfortable, and if they're likely to be in two to three years.

"Don't approach someone who is just trying to make ends meet, or someone who is going to have a kid in college in the next couple of years," he says. "These are people who may want their money back before your business becomes viable. You can't have investors who will need money in a year's time if your business is still growing."

Keep an eye out for friends and family who are on a tight budget, expanding their families, buying a home or car, or paying tuition -- those people should never be approached for funding, he says.

Also, Arora cautions against accepting too many offers for funding, even though it sounds like it might be a good problem to have.

"If you talk to 50 people and each of them gives you $500 or $1,000, that's going to be very difficult to keep up with. You've got to be selective and know when it's better to take a single offer for $50,000," he says. "You can't have 50 people all coming to you at the same time asking you the same thing, 'How is the business? When will I get my money back?'"

No matter how many investors you take on, Arora says you'll need official documentation for each of the investments -- even for mom and dad.

"You will need contracts for every single investor that are black and white. They need to know what they are getting into, because there don't need to be any surprises down the line," he says.

Contracts will help make investors more confident in you and your business plan, he says. You'll seem well prepared, and your friends and family will see that you're treating their money with respect.

If your company is a corporation, Barbash recommends issuing stock certificates.

"Demonstrate to them that even if they are related to you or your best friend from college, you are taking their investment seriously and documenting it appropriately," Barbash says.

No matter what kind of company you're starting, Michael Sherrod, professor of entrepreneurship at the Neeley School of Business in Fort Worth, Texas, says to come prepared to any investor meetings with an exact figure of how much money you need. Although you might love to get $500,000 from a wealthy aunt, you've got to be realistic.

"At a minimum you must know how much you are asking for and how the money will be used," Sherrod says. "Negotiation will definitely be required, and it is important you have a clear notion of what you will accept or decline. It's much better to decline than to get stuck in a deal that won't work for you -- and kills your relationship."

No matter how the negotiations develop, Sherrod says to keep in mind that your family and friends come first. Nothing -- not even your business -- is worth ruining lifelong relationships.

"Never stop caring about your family and friends -- no matter how things turn out," Sherrod says. "The single most important thing in life is relationships."

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