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Tapping Friends and Family for Startup Funds Make sure you cover your bases before accepting a loan or investment from a friend or family member.

By Cliff Ennico

Opinions expressed by Entrepreneur contributors are their own.

Q: I'm planning to start a retail boutique. I have some savings but not nearly enough to get the business off the ground, and my credit isn't good enough to get a loan from any local banks. A favorite uncle has offered to give me some money to help me get started. Do I have to do anything "legal," or is it OK to just take the money?

A: With the economy in the grips of a major recession and credit crunch, many entrepreneurs have little choice but to tap friends and family members for their startup capital. But that doesn't mean you should treat them like "friends and family."

Nobody gives you money to start a business. People either loan you money--which you must pay back with interest over a specified time period--or they make an equity investment in your business--buying the right to receive a percentage of your future profits. Without proper documentation, there's no way of knowing whether your uncle is making a loan or an investment. If your business becomes successful, he will want a piece of the action. If your business fails, he will want his money back with interest.

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