No Loan for Business Start-up: What To Do?

While more than one reason for the rejection may be cited initially, that’s almost never, in fact, the truth. For every potential lender or investor there’s a single deciding factor. That makes this, despite initial appearances, always a single problem.

Clearly, if you need the money, this is a rational problem. What’s important is that, despite the personal relationship you share with the other party, you don’t let emotional issues come into play. For the investment or loan to work for both of you, it must be sought and given on purely impersonal terms. The bond between the two of you must remain an unspoken subtext and never become the subject of discussion. Treat their rejection as entirely rational, even if you suspect it may have emotional underpinnings, and you’ll be able to turn it around.

Business Startup LoansBefore even asking for the loan or investment you should have made sure you were an expert in the industry you were entering, and in the specific business you were planning to launch. You also need to know your business plan and loan proposal like the back of your hand. If you have to check the text for the numbers to answer basic questions you’re not expert enough. All of this information must be openly demonstrated for the other party to have confidence in you.

Expertise on the other party’s wants and needs, however, shouldn’t be flaunted. Instead, it should be used as the basis for your proposal. Your pitch should appear to be tailor-made for them . . . because it is. Remember the example I gave earlier where a relative would not loan money because of a bad experience he had with another relative who never paid him back? Becoming an expert means becoming an expert, not only on your business plan, but also on the motivations/feelings of those you are asking for the loan. The amount you ask for, and their planned exit, should perfectly fit their current financial plan.

Let the trust you have built up in your personal relationship remain in the background. It should serve as an invisible foundation for all the traditional business techniques you would use so create trust in someone you had never met before. You should dress and act the same in pitching Aunt Daisy as you would Citibank. Do any less and you’ll appear to be a less than serious businessperson who is taking the other party for granted. That’s not someone to trust with your money.

The secret to reversing a no from a friend or family member is the same as if it came from a banker or venture capitalist. You must first look behind the no and learn the reason for it, and then you need to ask for a reconsideration based on new facts that directly rebut the given reason.

One advantage of asking friends and family for seed money is that it’s easy to subsequently ask them for the reason for their rejection. The problem is they may not feel comfortable telling the truth. You’ll need to stress the importance “for your future efforts” of your getting the truth, and you’ll also need to be able to read between the lines. Remove all the euphemisms and camouflage and you’ll find that there are really only three reasons why a friend or family member wouldn’t give you seed money: they don’t think your business will succeed, they don’t trust your ability or character, or they don’t have the money.

If anyone says the reason they rejected your proposal is they didn’t like your business plan, then they should be asked for specifics. Say that you respect their opinion and want to see if you can overcome their problem. If they can’t offer any specifics, their real reason is something else. However, if they cite a particular element of the plan, offer additional facts that either dispel their fear or clear up their misconceptions. 

If you’re told the reason for a rejection is lack of funds, you’ve either made a mistake in your earlier research into their finances, or they’re covering up another reason. You can find out which is the case by asking them to become a loan guarantor rather than an investor or lender. If the only reason for their rejection was that they didn’t have money available, they’ll likely agree. If they continue to balk, then their real reason is something else, probably a lack of trust.

A friend or family member is unlikely to come right out and say that they don’t trust your skills or abilities. Instead, they’ll initially offer other reasons, and then when pressed, raise vague questions. “Are you sure you know what you’re doing?” they’ll ask. “Do you really think that’s the business for you?” they’ll wonder. Alternatively, if they’re concerned with your character they’re apt to cite some irrefutable rules like “I never lend money to relatives,” or “I never invest in retail businesses.”

Since your recent efforts at establishing trust in yourself as an entrepreneur, coupled with the personal trust you had built up during your prior relationship, weren’t enough to overcome their worries about you, it’s unlikely you’ll be able to turn them around yourself. Instead, ask if you can come back to them later, after you’ve lined up other investors or lenders. Then, your request for a reconsideration can be based on the demonstrable new facts of there being others who trust you enough to invest in your future.

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