Nine questions to ask before putting your money and relationship on the line.

If a friend or family member asked you to invest in their business, would you know how to evaluate the opportunity? Before you put your money and relationship at risk, ask these nine questions to better understand what the investment could mean for you.

1. What’s their track record?

Past success is not a guarantee of future success, but assessing a business owner’s track record can provide insight into their experience and abilities. Have they managed a business before? How was their relationship with other business partners and employees? How do they make decisions?

If the person asking you to invest in their venture hasn’t owned a business before, you can still assess how prepared they are. Ask about their relevant experience. How do they respond to setbacks and unexpected events? Who would they turn to for help or advice?

Also, ask about their general approach to budgeting, saving, debt and managing financial risk.

2. Do they have a business plan?

Anyone serious about launching a business should be able to explain their plan in detail and in writing. They should be able elaborate on the market for their product or service, startup costs, ongoing operating expenses and revenue projections. Do they plan to establish a business line of credit or take out an SBA loan?

While many businesses are launched without a written plan, the exercise of writing helps identify flaws in thinking, shows the realities of competition and cash flow, and ensures partners and employees are working toward the same goals.

3. What risks does the proposed business face?

No business is immune to outside forces. Make sure the business plan includes a description of potential risks and ways the new business will mitigate those risks. How might market, financial, operational or regulatory and legal risks affect the business? For each significant risk, ask how the business plans to respond.

4. Is the investment a loan or ownership stake?

Generally, there are two ways to invest in a business: as a lender or as an owner.

If you’re lending money, what’s the repayment schedule and interest rate?

If your investment means partial ownership, your equity percentage may determine your share of future profits or dividends. If the business is sold, you may also be entitled to a portion of the proceeds, depending on the terms of your agreement.

5. How much have they invested in the business?

Have a candid conversation with your friend about how much money they’re putting on the line for the business. If they’re asking you to invest more than they’ve put in themselves, ask why. Is the difference because they have limited funds, because they’re counting their time and labor as their contribution, or for another reason?

6. Who else has a stake in the business?

If there are others with a financial stake in the business, learn more about their backgrounds and experience.

As you vet other investors, consider learning about their past projects, checking online reviews and references, and, when appropriate, running background checks. You may also want to verify they have the funds they plan to invest in the business.

In addition to having a full picture of who’s financing the business, ask if the other investors will be silent partners or have a hand in strategic plans or day-to-day operations.

7. Are you both willing to get your agreement in writing?

Friendships shift and two people don’t always remember a conversation the same way. When investing in a friend’s business, put your agreement in writing. Each of you should consult with an attorney who can advise you on your individual interests.

If they are unwilling to put the agreement in writing, it may be a sign that you should reconsider the investment.

8. Can you afford to lose the money?

Even if your friend has a solid business plan, success is not guaranteed. 20% of new businesses fail by the end of their first year; by year five, half have failed, according to the Bureau of Labor Statistics.

New and established businesses face challenges that range from local economic conditions and global tariffs to the loss of a key employee or an owner’s health crisis. Like all investments, there’s a risk of loss. This applies whether your investment is as a loan or ownership stake.

If you invest in your friend’s business, consider how your finances would be affected if you lost some or all of your investment.

9. Are you willing to risk the relationship?

Investing in a friend’s business involves more than financial risk. If the business doesn’t succeed or money isn’t paid as agreed upon, the relationship could be damaged. Sometimes irreparably. How would you feel if this happened?

If you have reservations after getting answers to these questions, take them seriously. Investing in a friend’s business might not be right for you. If the answers give you confidence, proceed carefully, and make sure all agreements are documented in writing.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.