So you are ready to take the plunge and go into business for yourself. But, like many small business owners, you are finding the amount of money it takes to get a business off the ground both mind boggling and discouraging. For many, getting a bank loan is not a viable option, nor is running up balances on high interest credit cards. In fact, The Small Business Administration estimates that 95 percent of company start-ups are backed by a patchwork of savings and interpersonal loans.

There's no doubt that borrowing money from friends, relatives or colleagues could be stressful and risky. While there are over seven million outstanding loans between individuals at any given time in the U.S., according to the Federal Reserve Board, the rate of default on these person-to-person loans is fourteen times higher than that of bank loans.

So what’s the solution? Professional advisors, from accountants to financial planners to attorneys, unanimously agree that if you are borrowing from or lending money to friends and relatives, keep your eyes wide open and play it straight. That is, don’t assume anything—approach this important financial transaction with the same professionalism you would in your business dealings with clients: put it in writing.

If you are borrowing from or lending money to friends, relatives or colleagues, or even just thinking about it, these five tips from CircleLending will get you on the right track:

1. Document the loan terms
Handshakes are never enough. Relationships can be ruined due to misunderstandings about loan terms. If you don't write down the terms in a promissory note, future investors and creditors will also be wary.

2. Use a fair interest rate
Lenders will be much happier about forgiving payments now and again if they feel that the interest rate is fair. The IRS also may assume, depending on the terms and conditions of the loan, a rate of interest (Applicable Federal Rate) on a no-interest loan to a friend or family member.

3. Avoid balloon payments
Balloon payments or lump-sum payments at the end of the loan term are very risky for both borrower and lender. Borrowers inevitably cannot save enough to make the balloon payment and lenders inevitably cannot tolerate renegotiating the loan at the end of the term. Look to create a customized plan that works for your situation.

4. Remember the tax benefits
It is tempting to avoid formalizing loans among friends and relatives, but there are tax benefits to using a formal promissory note. In some instances, the interest on the loan can be deducted as a business expense. And in cases where the borrower cannot pay back the full loan amount, the lender is entitled to a tax deduction as "bad debt"—but only if the loan was formalized.

5. Enjoy the flexibility
The ability to create custom loan terms and modify them to respond to cash-flow fluctuations makes flexibility the bedrock of loans among friends and relatives. Use it to help your business get going.

Source: CircleLending, Inc. is a financial services company uniquely serving the needs of the interpersonal lending market in the United States. The company facilitates financial transactions between relatives, friends and private parties by providing an end-to-end solution for reducing financial and emotional risk. CircleLending provides non-traditional access to affordable credit and solutions to ensure financial success. To get your copy of Circlelending's FREE Small Business Private Loan Guide click here now!