Friends & Family
Friends and family members can be a key source of financial support when getting your business started. Advantages of getting funds from these people include:
- They may be more supportive than a traditional lender and more likely to help you out
- They might offer more generous repayment terms than a traditional lender
- Acquiring financing through friends and family, and repaying these loans, can demonstrate to other lenders your ability to take on and manage debt
Of course, the downside to borrowing money from friends or family is that it can strain personal relationships if your business fails or if you’re unable to repay them. Investing some of your own assets in the company first is a good way to preserve these relationships, as it demonstrates that you have a stake in the company’s success as well.
Some relatives or friends may be willing to give you money as a gift, but it’s more likely that they’ll extend you cash as a loan. You might also offer an equity share in the company, which can be a good option if you want to involve them in business operations. Whichever form of financing you choose, you should outline the terms in writing to make sure there aren’t any disputes later on.
Treat loans from family and friends as you would any loan application. Be prepared to make a pitch, and have a business plan ready. You should also have an idea of how much money you’ll need, including funds for initial cash, working capital, and home capital (the money you’ll need to support yourself until the business is profitable). This will give a realistic sense of how much of an investment is needed, helping you avoid the instinct to ask for too small a sum.
Friends and family may be more willing to grant you flexible terms on the money they loan to you. One option is to tie repayment to a percentage of your business’s cash flow rather than a fixed payment schedule. The terms should also spell out what should happen if you need more time to make a payment or skip a payment.