• Decide when and where to discuss the proposition. Decide whether it's better to bring your request up in a casual conversation or at an informal meeting. In either case, you should choose a setting that's suited to your relationship -- for a very close relationship, it might be in the potential lender's home at a time you regularly visit them, whereas a restaurant or café is a good location for meeting someone with whom you're not especially close.
• Plan what to bring. Think about what you can bring along to illustrate your plans, such as a brochure, sample product, or company logo, but remember that this is an informal situation where detailed plans and promissory notes would be out of place.

To actually make a compelling pitch, start by getting your potential investor excited about your business idea. Then, ease into your request when it seems to arise naturally. If the conversation goes well, wrap up by explaining that you'll shortly be sending a copy of your business plan and a request letter; don't try to formalize the loan or investment right then and there. If the conversation doesn't go well, give them time to review your request and maybe your business plan, then follow up to determine what your prospect needs to get to yes.

Document the Loan or Investment

Once someone has agreed to participate in financing your business, it's crucial to get the agreement in writing. In the case of a loan, you and your lender would draw up a promissory note detailing the amount you'll owe, your repayment schedule, and penalties if you fail to make a payment. In the case of an equity investment (which assumes that you've set up a corporation or LLC), you would negotiate a stock purchase agreement that includes your disclosures about the business and a description of the investor's ownership rights.

For more information on every aspect of private financing -- from making your pitch to preparing the appropriate paperwork to maintaining good relations with your lender or investor over the life of your business, get Investors in Your Backyard: How to Raise Business Capital From the People You Know, by Asheesh Advani, CEO of Virgin Money USA (formerly known as CircleLending) (Nolo).