Near & Dear Financiers: The Upside of Private Loans

From Business Week's SmallBiz Insert in Summer of 2006. Link

When it comes to financing a startup, family and friends may be not only a relatively approachable source of money but also the cheapest.

CircleLending, a company in Cambridge, Mass., that formalizes and manages private loan agreements between entrepreneurs and their friends and family, compiles its CircleLending Business Loan Index to track the going rate on personal loans to entrepreneurs. (For a review of the company's guide to raising friends-and-family money, see page 86.) In April, the average interest rate friends and family charged entrepreneurs was 7.62%. That's less than the 8.01% the Federal Reserve Board says is the average for commercial and industrial bank loans of less than $100,000. And it's a lot less than double-digit credit-card rates, another popular source of early stage financing for budding entrepreneurs.

It helps, of course, that friends-and-family investors aren't out solely to make a profit. "There's a motivation to help and be a part of a success," says CircleLending President Asheesh Advani. After all, you always knew you could count on Mom and Dad.