Small business loans/ friends and family investing/ Thoughts, recommendations?

Greenberg Woods

Greenberg Woods

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Dec 27, 2013
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Hey guys, as you may or may not know, im currently looking to expand my wood business to include more slabs, turning stock and the like, im hoping to use my awesome wood connections to get bigger and better stock. Don't worry, i will never stop selling knife woods.

For the entirety of Greenberg Woods, its been self funded. I got about $6000 for my bar Mitzvah at 13, and all the further investment into the business has been the profits of wood sales poured back in. But as a 20 something year old, the sales of wood also have to pay for my rent, and food and very sweet girlfriend.

I have been looking to raise capital from friends and family to expand, and I was wondering if any of you guys have done the same thing, for knife making or for other business aspects. What payback method/ investment method did you use? How did it go? Is there anything you wished you knew before?

I was debating between a profit sharing type, where in individuals would buy a share of a specific slab, and when their specific slab sold split the profit, or a more generic approach where people receive a stated percent interest on their investment after a period of time.

Im very new to this aspect of business, and I would really appreciate hearing peoples thoughts and experiences here.

Thanks,

Ben Greenberg
Greenberg Woods

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Hey Ben,

First let me moderate what I'm about to say with this little blurb...
I'm not an entrepreneur, I have never managed a for profit business, nor have I done much investing.

That being said, here's my opinion. Don't involve friends or family in loans or investment, or really any financial venture if you can help it.
In my limited experience it's a really good way to lose friends and estrange family.

If I were to borrow money from friends or family, I would make a contract with all interested parties, spelling out exactly what they are getting out of the deal. Use a lawyer.

Likewise, any investment in the business by friends or family needs to be contracted as well. Especially if you expect to retain control of your business, the way it runs and what kind of products you produce. Investors expect profit and in some cases, a say in what you are doing with their money.

Make sure you end up serving your own interests, instead of ending up a slave to your own creation, if you know what I mean!
 
Having friends/family money in slabs of wood that you need to pick process and sell to make back their money is not a way you want to be involved with with people you are close with.
If you want to get money from friends/relatives, let it be a loan under very clear conditions and pay it back with an agreed amount of interest. Also stand for the loan personaly, not as a business.

I like the idea of people investing in slabs but maybe more in a croud funding kind of way.
Sell certificates like shares in the old days.
On the othe hand you'd have to sell a lot of them, bringing administrative tasks.
 
I'll offer a slightly different perspective (fwiw), but if you've got a good relationship with family, then in my experience, short term loans are fine, especially if you're willing to look at it as an investment for them
I'll agree on the comments about the probability of friends not staying friends.
 
I'll just give my 2 cents, if I had the option to loan or purchase stake in your business (or any small business, set up by eager young entrepreneurs) I would be in.
 
Taking personal loans from friends/family is a risky proposition. Giving shares/stakes almost makes it a partnership with you doing all the work. An old saying from years ago was, “A partnership is a sinking ship”. Yes, some have worked out well, but many have not. A line of credit through a legit lending institution backed by SBA seems like a good way to go. Whatever you decide, good luck with it.
 
Just thought I'd add, I'd much rather share my profits with a family member who loaned me some money (or, invested in my business if you will) rather than with a company who is already making tons of money investing in other things.
 
Don't mix "Family/Friends" with your business.. if you "Borrow" money to buy more stock
try to pre sell some of it before it arrives.. get your "Loan" payed back as fast as possible. (keeps you in good with lender)
i have personally never even thought about asking "Family/Friends" to invest i just save up to buy whatever i want/need.
 
Ben,
It sounds like you're looking for short term funds to increase your inventory. If that's the case, you may want to think about a "line of credit" (LOC) from a bank. Your business draws down on the LOC when you need to purchase more stock, then repays the LOC when the stock is sold. You're only paying interest when the LOC is drawn on. The SBA also guarantees LOC's. You will likely need to provide some sort of collateral to secure the LOC - depending on your business's finances, the collateral could include the inventory you finance, machinery and equipment, real estate and personal guarantees. It can be a little less difficult asking a parent for help with a guarantee as opposed to asking for a loan or investment.
Good luck
J
 
If a bank won't loan you money, neither should anyone else. If a bank will loan you money, go that route and start building a relationship. I can tell you from experience there are three things every successful business needs - a good banker, a good accountant/CPA and a good attorney. The sooner you get those things going the better off you will be.

As others have said, loaning money between friends and family is asking for trouble and hard feelings. There's a reason that is said so often and that reason is it's true.

Good luck!
 
Agreed with most of the above comments, especially the SBA, and focusing on running your business as a discrete business. I’ll try speaking at this from the investor side of things…. We have made several investments in startups/small businesses. Some have succeeded well, others have failed miserably (ie total loss of our investment). Most “casual” investors likely won’t have the mindset that a total loss can occur … hence the anger and your loss of relationships with family and friends. So … best to get your money from a “professional” lender (like the SBA). Also, there is *real* danger in expanding a business too quickly … and an experienced professional lender will ask the appropriate questions (business plan? Options/costs for resources/supply/sales) that will help keep expectations reasonable. You might also consider working the local business network to see if you can put a small informal board of advisors in place (for such a small business many will likely be willing to act in that stead free of charge) … see above “keeping expectations reasonable “

Fwiw
 
Ben,
You could also try asking your suppliers for help in growing your business. Your suppliers already have a stake in you and would like to see you grow and become a bigger customer.

One way to get their help is to ask for better terms. I don't know what your current terms are (Cash in advance, COD, 30 days, etc). You could ask for longer terms..... buy the wood today and have up to 90 or 120 days to pay. They might charge a little more, then offer a discount if you pay early. Or they could charge interest after 30 days.
J
 
For the entirety of Greenberg Woods, its been self funded. I got about $6000 for my bar Mitzvah at 13, and all the further investment into the business has been the profits of wood sales poured back in. But as a 20 something year old, the sales of wood also have to pay for my rent, and food and very sweet girl
Click to expand...

If you need it, yes use a line of credit from a bank or credit union
However if you have no job, it's hard to get.
Reliable employment income is what they like.


A business should be able to self fund, with debt you run the risk of ever increasing debt.
Do you still have the original 6K ?
If you can't continue to self fund, you need to increase income or decrease expenses.

This is powerful - it's easier to reduce expenses that increase income.
"A penny saved is a penny earned", not really.
Net income, after taxes overhead and business costs come into play.
You have to bring in almost 2x the amount of new sales revenue to net the same amount.


Inventory turnover is important, move it through the system faster.
Look at cost accounting. What makes more; larger higher complexity high dollar woods, or smaller simpler, cheaper that move in greater quantity.
One man operations run up against time.
Consider some woods that sell in bundles, say 4x at a time to consolidate shipping and admin time
 
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