The following excerpt is from Entrepreneur’s book Finance Your Business. Buy it now from Amazon | Barnes & Noble | iTunes
Joe Meisch had already invested tens of thousands of dollars in the temple massager he developed to relieve tension headaches. But he needed a few thousand more to finish updating the product based on feedback from beta users.
He’d already tapped friends and family while building his original prototype several years back, so he figured that well had run dry. This time Meisch turned to TrustLeaf, a platform that formalizes friends-and-family fundraising by offering free personal loan agreements using attorney-prepared templates.
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The Meisch clan was impressed. Joe’s sister, brother-in-law and a family friend invested $ 2,500 in all. Now the former U.S. Army reservist, who had formerly donated his massagers to combat veterans, is finally selling them online to the public.
Since TrustLeaf launched in 2014, dozens of companies have raised several hundred thousand dollars in fundraising campaigns on the platform, says CEO Anson Liang. Add in borrowers who have used TrustLeaf’s contract templates without creating a campaign on the site, and that number jumps to $ 41 million, he says, with loans averaging $ 48,000 at up to 10 percent interest.
Liang, a serial entrepreneur who knows firsthand the awkwardness of asking loved ones for a loan, built TrustLeaf along with head of business development Daniel Lieser. Their goal: to help the 38 percent of small-business owners who tap friends and relatives for starter capital each year. “It just takes the stress and emotion out of the combination of family and money,” Liang says.
Fundraising campaigns posted on TrustLeaf aren’t public; they’re visible only to people the campaign creator invites by email. “That’s actually one of the key differentiators of our site,” Liang says. “A lot of people want to keep their business idea and their fundraising process private, especially when asking friends and family for money.”
There’s no minimum ask for fundraising campaigns on the site, which tend to span 30 to 45 days. Borrowers can invite as many supporters to contribute to their campaigns as they want. They can also suggest several potential loan amounts and repayment scenarios.
Attorney Curtis Mo, a partner at global law firm DLA Piper and a TrustLeaf board member, created the site’s template loan agreement. Entrepreneurs plug in the names, loan amount, terms and interest rate, and then both lender and borrower sign the document online, where it’s accessible 24/7. No private financial data is required to create a campaign or contract on the site.
Borrowers can use TrustLeaf’s tracking and communication tools to keep tabs on payments and update lenders on their business’s progress. The ability to accept loans and repay borrowers through the site is coming, Liang says; the same goes for a convertible equity note template founders can use for loved ones who would rather be repaid in company shares than interest.
The formal contract and ease of use made believers out of Meisch and his family. “They made the process organized and added a sense of legitimacy to what I was doing,” he says, “instead of me just picking up the phone and asking, ‘Hey, can you loan me another $ 1,000?’”
Related: The Basics of Borrowing From Friends and Family
Armed with the additional funds, Meisch was able to stay in business long enough to attract the attention of Walter Reed National Military Medical Center, which has conducted trials with his product on PTSD patients.
When the opportunity to buy an established hair salon fell into Hayley Groll’s lap, she quickly took stock of her financing options. The veteran hairstylist wasn’t approved by the online lender she initially contacted. Then she found Austin, Texas-based Able, which bills itself as a “collaborative lender.”
Within three weeks, Groll had a three-year, $ 105,000 loan, enough to buy Shag Salon and renew its 1,850-square-foot commercial lease for a decade. Even better was her interest rate: 9 percent.
The brainchild of Harvard MBAs Will Davis and Evan Baehr, Able offers business owners one- to three-year loans of $ 25,000 to $ 250,000 at 8 to 16 percent interest — but with a twist: Borrowers must raise the first 25 percent from friends and family.
“What we’re really doing is trying to find the people who are being missed by traditional banks and even nontraditional online lenders,” Davis says.
Able conducted a beta test prior to its official launch in 2014, tweaking the terms and procedures with each loan. That year, the online lender made 50 loans ranging from $ 5,000 to $ 150,000, mostly in the Austin area, but received nearly $ 40 million in loan requests from entrepreneurs nationwide.
To qualify for an Able loan, businesses must be at least six months old. Davis wouldn’t stipulate revenue requirements but says Able’s borrowers to date make $ 1 million or less annually.
After a business owner fills out an online application, Able uses its proprietary technology to assess the company’s bank accounts, cash flow and credit history — pretty standard stuff. What’s new is that Able’s algorithm also looks at a company’s social media following and reviews via Yelp, Facebook, Twitter and LinkedIn. Davis wouldn’t reveal how a business’s online footprint is weighted or what metrics help or hinder an applicant, but he claims Able gains a more complete picture of a company’s creditworthiness than any bank can acquire.
“This is really innovative,” says Charles Green, managing director of the Small Business Finance Institute, a resource site for commercial lenders. “You talk to a commercial banker about Facebook, and they don’t even know what it is, except that their daughter has an account.”
Once Able gives the green light, borrowers need to line up at least three backers (friends, relatives, mentors, colleagues or customers) to collectively kick in 25 percent of the approved loan. Backers must contribute at least $ 1,000 each, and family cannot contribute more than half of the 25 percent. Hairstylist Groll received $ 30,000 in all from five backers, including three long-standing clients. (Able’s software automatically confirms that backers and borrowers are indeed acquainted.)
Depending on how fast the borrower lines up backers, funding can arrive within two weeks of applying, “much quicker than traditional bank financing,” Davis says.
Related: The Ins and Outs of Microfinancing Your Small Business
In addition to APR rates, Able charges a loan origination fee of 3 percent, but there are no early-repayment or other fees. Borrowers choose whether they want to repay the loan in one, two or three years, and Able’s platform handles repaying the backers directly.
Although Able dictates the APR of its 75 percent loan contribution, the individual backers providing the other 25 percent are free to choose their own interest rates. Able takes their terms and blends everyone’s interest rates into one composite rate.
“In some cases,” Davis says, “some of the backers come in with a lower APR rate that reduces the overall interest rate of the loan itself.”