Banks, credit unions and other lenders have tightened business credit in recent years, and they don’t seem ready to loosen anytime soon. So small businesses in position to expand are having trouble finding the money they need, and are looking at alternatives.

One of those may be borrowing from a family member or friend. According to SCORE, a nonprofit association of retired executives and business owners who assist small businesses, investments by family and friends account for more than half of all investment dollars for startup businesses.

Of course, loyal family members and true friends might loan you money just because they want to see you succeed. But with the low interest rates being paid on bank CDs and money market funds, they might also be hoping your company will pay them a higher return on their money.

If you’re looking for capital, don’t just blurt out a loan request in the middle of Thanksgiving dinner or at your class reunion. Politely ask the potential lender if you can meet privately. Then prepare what you will say. The first step in successfully borrowing money from friends or family is to assure them:

Their investment is smart financially.

Their investment won’t harm your personal relationship.

It’s all in the details

If you ask for a loan from a friend or family member and get a positive response, plan to meet again to discuss it further. This time, take a list of details, including how much you want to borrow, any other sources you are using, the interest rate you’ll pay, your proposed repayment schedule, the legal and financial protections you’ll offer, and the down payment you’ll make for what you’re buying.

Don’t pressure, but be reassuring. Be realistic about how much money you want to borrow. Base your request not just on what you need, but on how much the person can afford. Don’t ask for more money than a person can afford to lose; ask more than one person for loans if necessary.

Treat your prospective lender the way you would a bank. Be willing to show a detailed business plan and put up some collateral. Show your credit report and any other personal financial statements they might be interested in.

Once you secure a loan, proper documentation is essential. Formalizing the transaction makes it clear that this is a loan, not a favor, and the person’s role does not go beyond that of lender. Setting up a repayment plan lets the lender know you are serious about repaying.

There’s another argument for proper documentation, and it relates to taxes. Suppose the uncle who grants you a loan slaps you on the back and says, “Aw, shucks, just pay me back when you can,” and refuses to charge you interest. You should still draw up a contract or promissory note, because otherwise the IRS can actually attach an interest rate to the loan for you. The IRS may also mistake the loan for a gift or an inheritance. Any of those events will have tax consequences.

Help is available

If all the red tape seems overwhelming, you may be relieved to know there are services that will prepare documents, create repayment schedules, process payments, provide year-end tax statements, and do whatever else is needed to facilitate loans between private parties.

A loan service can go a long way toward reassuring family members or friends that borrowing money will not harm your relationship. If an outside company manages the repayment processing and recordkeeping, for example, your lender won’t have to start an uncomfortable conversation in the event that, say, a payment is late.

Several online loan service companies match people wanting to lend money with people wanting to borrow. Sites to check out if you want someone to handle the details of a loan from or to a friend or relative include www.zimplemoney.com, www.loanback.com, www.one2onelending.com, and www.wikiloan.com. These sites all focus specifically on facilitating and managing peer-to-peer loans between family and friends.

And if you want an example of a family-and-friends loan success story, just look at British industrialist Richard Branson, who, thanks to a loan from his aunt, founded Virgin Atlantic Airlines, Virgin Records, and more than 300 other businesses. He then started Virgin Money, a European peer-to-peer lending service.

If you are turned down

The key to successfully borrowing money from a friend or family member – no matter what business you are in – is to be as honest and professional as possible. If a bank turned you down, the mature, professional thing to do would be to accept the reasons, revamp your presentation and take your request to another bank.

So if a friend or relative refuses you, assume they have their reasons and move on to Plan B. Maybe they’ve been burned in the past and have sworn off loaning money to friends. Maybe their spouse isn’t comfortable with the idea. Or maybe they just don’t have the resources you think they do.

Whatever the reason, it’s not worth spoiling a relationship, so let it go and drink a toast to your business with them next Thanksgiving.