Should you borrow from friends to start a business?
Ask me in about three years and I should be able to answer from experience.
At best this question elicits mixed feelings from most people. On one hand are all potential ills associated with one friend squandering another's hard earned cash. On the other hand are the strengths of the person, the relationship, and the business proposition in question.
The way I look at this question though:
- Aren't your friends just the people you'd hope believe in you enough to help you get your business started?
- If you really are creating a mutually beneficial opportunity, wouldn't you want your friends to benefit?
Perhaps this opening question is too broad to be useful, as the answer should depend heavily on the who, what, when, where, why and how much.
But back in July, somewhere in California, while hiking the Pacific Crest Trail, I opened this can of worms by sending some college friends this email:
"RE: My Engineering Start-Up (Mutually Beneficial Opportunity)
While walking I've decided to start my own engineering consulting business when I return from the PCT.
I'm looking to raise $10,000 in the form of a 4 year non-traditional business loan. If I hit my conservative target of $100,000 in gross revenue as a business by year 3 I'm offering to match each $1,000 share of the loan with a $1,000 return.
See the attached word file for the general business overview.
See the attached excel file for cash flow details.
This is a mutually beneficially business opportunity. I'm asking you guys to participate and help me get this show on the road.
Thanks for your time and consideration. I'll let you guys think it over for a couple weeks. I'm looking for verbal commitments this month before I send over contracts the first or second week of September.
The plan is to have all funding in place by October 1.
Check out the Google drive links below for the attachments I sent in that email:
The background of that attached business plan:
While hiking the Pacific Crest Trail (PCT) I rediscovered a way of life that I lost working my 8-5 as an engineer. For the first time since cycling the U.S.A., every day counted towards a goal of my choosing (walking to Canada). In the spirit of this re-discovery I resolved to find a way to make each day after the PCT count towards a new personal goal.
The goal had to be quantifiable, something I could inch closer towards any day of the week, 365 days a year. Eventually I came up with the idea for “Million Dollar Mountain”, the journey to obtain a net worth of one million U.S. dollars starting from a net worth of less than $0.
There are an infinite number of roads to a million bucks, but I rationalize the best place for me to start on this journey is with the most profitable marketable skill I have currently, water resource engineering.
Over the last 4 years at the international engineering company AECOM, I’ve earned significant marketable experience across the water field. My experience in two specific niche markets, hydraulic modelling and water rate studies, can readily be converted into a self employed consulting service with limited to no liability or overhead.
But in order to get my engineering consulting business off the ground I will need to generate $10,000 funding in the form of a non-traditional business loan.
The document goes on to lay out the purpose and incentive of the mutually beneficial opportunity.
Here's the text from the section "Why Do I Need Money?"
Why Do I Need Money?
By the time I finish the PCT I’ll have less than $1,000.
In order to get this one man road show off the ground I’ll need cash for a laptop capable of high end modelling requirements. I’ll also need cash to purchase and convert a van.
A van man.
I’ve got no cash, so I have to be creative with how I combine a rent payment, a car payment, and travel arrangements.
A new large van converted into a livable, portable office space that’s presentable in a client parking lot as a commercial vehicle is essential to my vision for this business.
The laptop might cost upwards of $2,500. I need $4,500 for a down payment on my mobile office (van), and I need another $3,000 to convert the empty cargo area in the van into a living space (bed, solar, electric cooktop, fridge).
My dad and I will convert the van over a couple weeks in October full time. The only subcontracted work we may need is for mounting the solar panel, cutting a hole for a vent in the roof, and mounting a potential wastewater tank where the spare tire goes.
Beyond the $10K there are a number of operational contingencies that may add to the cost of this startup in a nonlinear fashion. I’ve identified these contingencies in the attached spreadsheet and will likely fund them as (if) necessary through personal credit.
This email I sent from the trail back in July was my best guess at taking this goal of mine head on. I put my thoughts to paper and communicated this idea as best I could. I was able to raise $7,000 of my $10,000 goal from friends. (One incredibly generous couple gave me $1,000 with no strings attached, no request for repayment. I still need to write something another time to spill out all my thoughts on that unforgettable moment).
I constructed this contract linked below bind the non-equity holding loan agreement:
The additional money I've needed I've borrowed from my dad, who is also strapped for cash while he hopes retirement can be found under a never ending supply of medical bills for my mother (But I assure him he won't have to worry about retirement when I hit my goal).
I'm making this post tonight because at some point in the next couple days I need to send out my first revenue report to those friends that helped me get this thing started, not only with the van, but the very lap top I'm writing this blog post on. All of those initial dollars were critical. Had they not been there to start, my first revenue report would be $0 as I wouldn't have had the lap top to earn my first dollar when the timing called for it. Instead that first revenue report will total $750.00. That may not seem like much, but remember, this is a game of inches.
Entirely a fault of my own I am waiting until my last name is legally changed to Forge to file for my LLC and acquire the necessary professional liability insurance to pursue engineering work. That name change court date is set for April 28.
Since sending that request to borrow money from friends back in July (2016), most aspects of my climb up the million dollar mountain have not gone as planned. I finished the PCT a month later than expected. I'm not bar-tending. The van is only 30% complete. My LLC doesn't exist yet. And my driver's license still says Budinger.
But I intentionally structured this loan agreement amongst friends to require no repayments during the first year to make the type of uncertainty I am facing more manageable.
Take this post as a point in time look in to my state of affairs. This part of the story has sorely needed some attention. I'll be dropping back in on the subject of business from time to time. With the loose ends I have across the board right now, there's a lot of content to cover in future posts. And only 143 Sundays left to reach my goal.
The find a way approach continues.
I'm still not waiting to live.