Tap Into Your Network for Business Funding

When You Hear No

What if, even after you address your prospective lender's concerns, or the person reviews your customized loan request, he or she turns you down? Listen carefully to the person's reasons. If he or she expresses concerns that ring true, or if you hear a similar message from several people, you'll learn important lessons for the future.

There are two circumstances in which you need to take "no" as the lender's final answer. The first is if your lender has given you a clear and firm refusal, and you accept that his or her concerns or objections are valid. The second is if your lender has given you a muddled refusal that seems to be masking some concern he or she is unwilling to communicate. Do you really want to get into a business transaction with someone who won't say what's on his or her mind?

Keep track of prospects you sensed had a favorable opinion of your business idea but weren't fully convinced. Some logical times to return to those people are:

  • When the agreed-upon amount of time has passed since your initial meeting
  • When you've got a more convincing presentation
  • When your business has gained a major new customer or supporter
  • When your potential lender's financial or life circumstances have changed

Even after you obtain the financing you need, keep the records of your search. Don't discard any draft lists of prospective investors. As you grow your business, you'll likely need additional financing. Who knows? The contact you wrote off during the first round could lead you to your next source of capital.

Handling Objections
Here are some ways to respond to common concerns prospective investors might raise:

  • "I don't have the money to give you." Suggest a smaller amount. Also, ask whether the person can think of someone else you might contact.
  • "I have other plans for that money." Politely ask about the plans. Maybe you can make the term of your loan short enough to repay your lender in time for their other needs. You may want to offer collateral, to offset any risk to the money.
  • "My money is tied up in an investment/retirement plan/annuity." Encourage your lender to contact his or her financial advisor or accountant to find out whether the money can be moved--without penalty--to an account that allows private investing.
  • "I don't believe your business will succeed." Offer a loan secured by collateral, so that even if your business does go belly up, the lender can sell the collateral to cover your debt.
  • "What if we disagree over the terms of the deal?" Emphasize the flexibility inherent in a private loan or investment--there are a multitude of ways to structure the deal, so you're bound to find one that meets both your and your lender's needs.
  • "I'm afraid our relationship will suffer if there's a problem paying back the loan." Point out that the promissory note will include actions to be taken in case of late payments, missed payments and default. Suggest using a third party to administer the loan.
  • "I have a friend who lent someone money and never got a dime back." Explain what consequences you would face, under the written agreement you plan to sign, if you made a late payment, missed a payment or defaulted.
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Asheesh Advani is CEO of Covestor, an online marketplace for investors. He founded CircleLending, which was acquired by Virgin.
 

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This article was originally published in the August 2006 print edition of Entrepreneur with the headline: Friends With Money.

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