Should I hit up my family for start-up cash?
Wednesday, September 26, 2012/
I’m starting an online retail operation from home. I need some cash – should I approach family and friends?
This week’s Secret Soloist is answered by Heat Group founder Gillian Franklin
It’s great that you have completed the research and identified a market for your online store. This is an exciting time. I love seeing people embrace their entrepreneurial spirit.
When it comes to borrowing money from friends and family, no one can ever guarantee that it won’t affect the relationship.
Not that I want you to focus on the negative, but you do need to consider the worst case scenario – the business fails and you can’t repay the money.
Would you be willing to risk the relationship? Not to mention the pressure you would feel to repay the money in a certain time frame.
The other key consideration is what they get in return for their funds? You can give them a financial reward by paying monthly interest or you can give up some equity or shares in the business so they get the long-term benefit of the investment.
Usually professional investors are looking for an average return of 15% and even up to 25% on their funds. That means if they invest $10,000 in your business, they would expect a return of $1,500 per annum.
This is all on the high side of course, as the sharemarket usually pays returns of less than 10%. But because there is high risk, people often expect a higher return.
You can also approach angel investors to provide the seed capital. While professional investors often look for this higher return, they are very valuable as they can give you excellent support and advice.
In terms of your costs, many businesses start out without taking a wage, but this is not ideal, as no doubt you also have expenses to cover.
The best thing is to write a business plan that sets out the concept of what you want to do and what you believe this can deliver for you.
Look at what you expect your monthly costs to be and what your revenue could be. It is often good to allow for a 10-20% variance for a start-up, as things never go according to plan (sometimes the amount and sometimes the timing, but it is not uncommon for things not to be as originally expected).
It is good to outsource as much as you can so your costs stay “variable”, but as these people providing the service to you are doing it for a business, it means that they will have a margin or mark-up in the costs.
So this is the price you pay for outsourcing rather than doing in house, i.e. it will be more expensive. Only you can decide which will be the best option for you once you have prepared your business plan and costings.
For your next steps, I suggest:
- If you don’t already have one – write up a business plan.
- Confirm the technology platform you will be using and the associated costs.
- It’s vital that you work out how much capital you need to start-up the business and operate the business for the first six months (working capital) assuming you will not get any revenue immediately.
- Talk with a financial adviser to look at all your options – loan, equity, business partner, angel investor, friends, etc.
- Investigate grants (federal and state governments).
- Take a step back and, looking at the big picture, consider if borrowing from friends is something you are comfortable with.
- If you are going to borrow money from friends, speak with a lawyer about an official agreement. Also consider repayment options – money or possible equity in the business.
You are about to embark on a very exciting step in your career. The key thing is to stay focused, work really hard and try to get together a group of people who have “been there before” who would be willing to assist you with all the issues that will come up as you embark on this journey.
I always believe that “wisdom and age go together” and encourage people starting out to surround themselves with people who have vast experience and can give you sound advice. This will certainly minimise any poor decisions.