The Guided Entrepreneur: Borrowing From Friends and Family to Fund a Start up or Growth of a Venture or Small Business
Borrowing from believers...
Financing an entrepreneurial venture in the start-up or even growth stages can be frustrating, scary, and downright difficult. When many budding or aspiring entrepreneurs think about financial funding, their thoughts may immediately go to bank loans or high-interest credit cards, even thoughts of angel investors may dance in their heads. However, there are other options and avenues that one can pursue that, if researched and executed thoughtfully, could relieve some of the anxiety that comes with securing the money to make dreams and business plans come alive. A particularly appealing one: borrowing from friends and family. Who better to help fund your aspirations than those who believe in you and support you, right?
There are certainly many aspects that make this avenue both appealing and a potentially viable option for an up-and-coming entrepreneur who may be a bit short on cash. Borrowing from friends and family allows you to present your ideas and your business plans to people who know and understand you. They have likely seen your successes and your failures, they have watched you find solutions to problems, and they have observed you formulate your venture day after night after day. They are not judging you on paper alone, they can see and feel the genuine passion you have to make your visions come true.
The benefits do not stop there...
Business owner Steven Grady, co-owner of a popular North Carolina sub and sandwich store called South of Philly, says that “the biggest advantage to receiving money from friends and family is the fact that the loan is quick and easy. While some may, and should, ask for a business plan before giving out their hard-earned money, there is no formal loan process, no hit to your credit score, and the loan can be completed instantly. Friends and family are often much more forgiving if you are unable to pay your loan on time and may be willing to give you an extension or create terms that are easy for you to work with while you try and set up a new business.” Grady also points out the fact that family and friends may be a little more understanding than a loan company or a bank when it comes to repayment terms and conditions. When ends do not quite line up on the cash flow side of things, someone who loves and cares about you may give you a little longer of a grace period than a credit card with 29.99% interest rates.
The headaches that this funding option may help avoid, can easily and quickly be replaced by the potential downfalls. Asking for money from an understanding and loyal loved one or friend can certainly be less daunting in the initial phases of requesting for the funds. However, if repayment becomes delayed or non-existent, things can go sour extremely quickly.
Potential pitfalls and alleviating risk...
Grady warns that “The biggest risk is obvious, the potential loss of a close family member or friend. Unfortunately, money can destroy relationships, and when the venture does not take off the way you expected it would, it can potentially leave some people with hurt feelings. Depending on the amount of money involved, and how much this money means to the individual, sometimes these relationships can be ruined permanently.”
To help alleviate some of the risks Grady suggests, “when borrowing money from friends or family make sure that terms are set in place that are acceptable to both the borrower and funder. Both sides need to understand that a business takes time to grow, but at the end of the day the borrower needs to make sure the agreement in place is going to make sense for everyone involved.”
Making sure that all parties involved understand both the certainties and what-ifs of the entire transaction is important in protecting all pockets and feelings involved. Borrowers should also make every effort to be fair, open, honest, and timely when dabbling in the indebtedness to friends and family members.
Borrowing from friends and family is a delicate process and should be approached as such. Treat your family member or friend with respect and professionalism and be sure to keep business strictly business. Though you are dealing with people who you have personal relationships with, keeping personal ingredients out of the mix can help save emotions in the long run.
Albeit there is no formal loan process per say. It is still important that you provide your friend or family member with adequate information that will help them to make sound decisions in handing over their hard-earned cash. Thoroughly present your business plan including realist financial projections, just as you would in a formal loan setting.
Keep in mind as well, yes, you are hoping your Uncle Drew loans you the money to get your business off of the ground, but that the terms and conditions of borrowing the money should work for you and your business as well. It is completely acceptable to walk away from a deal that you know will put you at risk, personally or professionally, even when you are negotiating with the people you care about.
© 2018 Natalie Newman