What are the pitfalls of borrowing from family or friends?

Friends and family are an invaluable source of support for the aspiring small business owner. And often, they’re an invaluable source of financial assistance as well.

In fact, more small businesses rely on loans from friends and family than any other funding source. Familiarity with the person and his/her business goals, the investment opportunity, and the ability to monitor the venture’s progress are among the major reasons why friends and family members willingly contribute to a start-up or expansion.

However, ready source of cash is not without its potential pitfalls. Business loans from family and friends also can be a disaster is they are not done right. Unstructured or loosely structured financing and payback terms can haunt both sides later on. Research shows that 14 percent of business loans from family and friends go into default, compared to about one percent for bank loans.

To increase the odds of success, approach family and friends with a detailed loan proposal, including financials from your business, just as you would a bank or venture capitalist. Be frank about the risks. If things go badly, they could lose all or some of their money. Consider the consequences of a soured business deal to your relationships.

Pick a financing structure that works best for your business and make certain everyone understands it. Specifically, be clear on whether the deal involves an ownership stake in your business, or whether it is a simple debt you plan to repay. And be clear about repayment terms.

To legally seal the deal, use a document such as a “Promissory Note.” Putting the terms of your borrowing agreement into proper legal form is crucial. You can find the downloadable legal documents you need, including many different Promissory Note variations, at www.findforms.com. Self-help legal publisher Nolo also offers loan forms and related information at www.nolo.com.

Another helpful resource is Virgin Money at www.virginlendingus.com, previously known as CircleLending.com before it was acquired by well-known entrepreneur Richard Branson. Virgin Money helps small business owners avoid the problems that can arise with loans from friends and family by providing loan administration, recordkeeping, payment processing and structural support. The service emphasizes flexibility to meet the needs and concerns of both borrowers and lenders, from terms and interest rates to repayment strategies.


Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

Should I buy or lease equipment for my business?

Ready to invest in some new equipment for your small business, but concerned about the added burden of a loan? Consider leasing.

Not only does leasing help you conserve your cash, it also ensures that you don’t wind up paying for equipment that quickly becomes obsolete or unsuited for your needs. And if you need the equipment only for a short time or special project, leasing saves you the hassle of having to be both buyer and seller.

There’s no limit to the type of equipment available for leasing, or the size of the company that can access it. Even one-person operations can lease equipment. Unlike loans, leases generally do not require a down payment. You’re required to finance only the value of the equipment expected to be used during the lease term. Depending on the type of equipment and lease arrangement, you may also be responsible for routine maintenance and other costs as well. When the lease expires, the equipment goes back to the leasing company, completing your obligation.

Leases are not loans, so their costs are calculated differently. Payments on an operating lease are considered an overhead expense that you can deduct from your business income. Generally, however, the cost of leasing is similar to the cost of other financing options when you consider the entire transaction.

Flexibility is another leasing hallmark. You can tailor a lease to fit your month-to-month, seasonal or annual cash flow needs. And if customers or the competition demand that you always have the latest technology, a short-term lease can help you get what you need and keep your cash. Most leasing companies offer lease-to-own plans if you determine that purchasing the equipment is in your best interests of your business.

The Equipment Leasing and Financing Association (ELFA), a trade group of leasing companies and financial services companies, has a special section that explains the basics of leasing at its Web site, www.elfaonline.org. You’ll also find guidance on leasing options and benefits, loan/lease differences, leasing terminology, and a searchable directory to help find a leasing company to meet your needs.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

How do I keep my employees motivated?

One of the first and most important lessons an entrepreneur learns is that employees really are a small business’s most important resource. In fact, the business literally cannot succeed with out them. Their talent, skills, and effort truly add value to your products or services, allowing you to focus on the planning and creative issues that will move your business forward.

Unlike your equipment, computers, and other resources, however, you can’t simply turn employees on and off for business hours. All employees need a clear understanding of their role in your business and how it can grow, plus the motivation to achieve and, even better, exceed those expectations. That’s why you, as the business owner, also hold the title of “Chief Communicator and Motivator.”

It’s important to have direct contact to make your message clear. Some owners try to save time and manage by email. That works only to a point. But direct contact builds trust and rapport.

Establish your business “mantra” and keep repeating it. Don’t assume that everyone involved in the business understands and buys into the mission as you do. After all, you’re the one who created it, not them. They haven’t lived and breathed every detail as you have.

Here’s one simple step to make certain you communicate clearly. Instead of asking if an employee understood your instructions, ask what specific steps the person will take to complete the task. That way you can be absolutely certain they not only understood, but also plan to complete the assignment in an appropriate way.

Avoid constantly criticizing employees. That hurts morale and can make people less motivated. If you highlight the positive and correct mistakes without getting personal, employees are more likely to deliver what you want.

While a good manager is also visible, it’s important to not make it appear that you are micromanaging. A quick chat about work and non-work issues during a stroll through your business is all the positive reinforcement is all most employees need. They’ll feel more comfortable about coming to you with questions, concerns, or suggestions. Augment the informality with individual and group meetings to share information and updates, brainstorm ideas, and simply get to know each other. Such interaction will not only help re-energize your staff, but the boss as well!

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

What are the best sales habits to practice to keep my customers?

The longer you’re in business, the more you realize that the only constant is change. You may be enjoying strong sales across a broad customer base, but those conditions could be far different in just a matter of months. A competitor’s offer may tempt your customers to try something different. Organizational and operational changes may require you to build relationships with new people from scratch.

While there are several approaches to these challenges, all share the same fundamental elements—good selling habits. For example, it’s important for your business to approach selling with a positive, service-minded attitude that focuses on your customer’s needs, desires and expectations. How do you get these valuable insights? Ask them. Most people love to talk about themselves, and what you learn will help you adjust your sales and service tactics accordingly.

Keeping the attention on them, rather than you, will also help you tune in to why they buy, or why they don’t. Plus, if you take time to listen and ask questions, customers will start to think of you and your business as a valued resource, rather than just a selling machine. You can easily show that you are willing to help the customer by anticipating what they need and having answers to potential objections.

Train yourself and your employees to smile. It’s easy to get grumpy or cynical if sales go south. But that’s when a good attitude becomes most important. Don’t be afraid to take a risk or try out a new approach from time to time. It could be a new marketing pitch or advertising channel. When operating a business in today’s competitive world, the greater risk is in thinking that the status quo will suffice.

Remember too that today’s customers have higher expectations than ever before. You can’t accommodate everybody’s needs, but automatically declining an unusual request will get you nowhere. By adopting a positive, can-do attitude, your mind will instinctively be alert to ways for doing things that once might have seemed unreasonable. That will ensure your customers keep coming back and, just as important, keep recommending you to others.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

Where should I direct my spending in these tough economic times?

SCORE counselor Alan Yarnoff once again offers his insights on the necessity of promoting your business in a slow and changing marketplace.

“Over the last eighteen months, the small business owner has faced a wide range of problems: liquidity has become difficult, sales have softened, and costs continue to grow. To the detriment of their future, companies have cut back or eliminated promotional spending as a means of staying afloat.

This, I am sorry to say, is probably the least effective method of looking positively at your long term growth. You must look at the strategies that helped build your business at a time when it’s most needed. Look back and recall how you grew your customer base, what promotions worked best, and then concentrate the limited promotional funds you now have to make those successful tactics work again.

If the best way to turn the tide is by keeping your current customer base, then place your promotional endeavor against this target. Open up a new line of communications with them by e-marketing, social networking: Twitter, Facebook, You Tube, or blogging. With a series of meaningful e-mail bursts, enticing offers, and actionable options for them to act upon, your business will start to improve.

If the road to survival needs a new base of customers, then apply your best efforts to sourcing new business. Review what worked in the past when you had the funds to use multiple methods of promotion and spend your dollars there. If print is the right way to go, advertise there. If special offers or couponing had positive results, then spend your limited dollars there.

Lastly, review your website and make sure it is working as hard as possible in building your business. You must allocate a portion of your promotional budget to making your site always look fresh and exciting. For new customers, it’s their first opportunity to meet you and shop your store. For returning customers, it’s their way of finding out what’s new, what special offers are available, and new trends in the marketplace.

Remember, the goal is to keep you business viable until the economy improves and the worst thing you can do is to stop being aggressive, because being aggressive is what built your business in the first place."

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

What can I do to improve customer loyalty?

Much has been written about the erosion of customer loyalty, and how cost-conscious buyers are putting a higher priority on price.

Fortunately, the repeat customer is far from becoming an endangered species. But in today’s highly competitive environment, you need to do everything possible to ensure that relationships with your customers don’t end at the point-of-sale.

“You need to give your customers something of extra value if you want them to return,” says international hospitality consultant Linda Novey-White. “Look at your business like a customer would. What could you be doing better, and what is your competition doing better?”

Start by anticipating your customer’s needs. Think ahead to what the market will be demanding in the coming months and determine what you can do better. Also keep abreast of trends that may influence your customers’ purchasing decisions. They may alert you to the need to modify your offerings to respond to new regulatory requirements, or changes in preferred styles and formats.

You can also gain insights into customer needs simply by asking and, more importantly, listening. Too many businesses take it upon themselves to advertise the next big thing without considering whether their customers want it or not. And while everybody wants a good price, they want a good value even more. Listening to and acting on your customers’ needs and concerns will make a lasting impression on even the most meticulous comparison shopper.

Adding a personal touch will also forge a stronger bond between you and your customers. Casual conversations will yield important information such as birthdays, professional accomplishments, and family events that you can recognize with a card or other low-cost token of appreciation. Everyone appreciates a helpful reminder in this busy world, and a message about an upcoming event such as change in postage rates or a new industry requirement will cement your reputation as a go-to source for more than just your product or service.

It’s also helpful to regularly share news about your products or services, and the issues that affect their use. You can do this on your Web site, or via a customer e-newsletter. Just make sure your customers specifically request to be on your mailing list.

Finally, make sure you deliver what you promise. “Too many people offer hype and then don’t follow through,” Novey-White says. “Delivering a product or service that disappoints is the fastest way to lose your customers.”

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties

How can I maximize word-of-mouth referrals?

Even in an age of high-tech communication, the most powerful and effective means of generating new business is also the oldest: word-of mouth. People naturally turn to trusted friends or colleagues for recommendations regarding product or service providers. You’ve probably used it yourself when searching for a mechanic, making major purchases, or weighing an outlet to promote your small business.

And because word-of-mouth referrals are free, you can’t be the return on investment that a positive referral can generate.

While a successful word-of-mouth marketing chain can sometimes start on its own, don’t assume that the phone will start ringing off the hook. Any successful marketing tool—word-of-mouth included—requires a proactive, patient approach to ensure that the right message gets to the right people.

A good way to get started is to create a simple marketing message that is easy for people to pass along. If it’s not simple, it won’t pass the test. But make it specific to a real benefit or need, not something vague or general. If you can, include success stories or testimonials from real customers. These can have a tremendous pass-along impact.

To stimulate word of mouth, you might also consider asking customers for referrals and recommendations. And put your networking efforts into high gear. If you network and get to know people in your community or industry, they will think of you when they need your product or service. Join networking groups and local business organizations, and attend conferences. Donating your products or services to local charities can generate goodwill and get your name around.

Consider introductory discounts or free samples. People are more willing to try a new product or service if they can do so economically. Many small companies have jump-started sales through carefully controlled giveaways.

Above all, perhaps recognize that people will happily spread the word about your business if you treat them well. Tales of negative experiences or poor performance can be difficult to correct once they are passed on. That’s another important reason why it’s important to continually provide superior service, address problems quickly, and anticipate your customers’ needs. Those are the things they’ll remember—and talk about.


Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties