It’s undeniably tempting if a close friend or family member offers you funds for your business venture. The money is usually interest and red tape free, provided when you need it and you won’t be sleeping on a park bench if you can’t repay it.
The option of loved ones as a source of finance may be seen as a last option by many budding entrepreneurs, but there are obvious advantages beyond those listed above.
Meeting loan repayments or satisfying targets set by a hands-on investor can be a huge headache for new businesses. Removing the nagging uncertainty of whether you’ll be able to honour the investment is a huge boost in the early phases of your start-up.
However, turning to family and friends for money can have major drawbacks. Although it’s relatively uncommon, friendships and even family ties have been ripped apart due to loans that have been badly managed.
You also have to be sure that you aren’t putting someone close to you in financial trouble by taking their money. Family members may become so enthused by your idea that they will offer money they don’t necessarily have in order to make the business a reality.
Investment in your business isn’t just about the money. An angel investor, VC and even a bank will provide you with essential advice and guidance, as well as funds. Whether your cousin Dave, who has no experience in running a company, can provide the same intangible input is questionable.
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If you do decide to go down the family and friends route, try to eliminate as many of these problems as possible. Make the agreement official by getting the loan terms in writing, with a clear understanding of when the money will be paid back.
Outline what happens in an emergency if the business needs extra funds or collapses. Treat your loved ones like any other investor, but with the added benefit of emotional support.