How to Use Friends and Family to Finance Startups
Financing their businesses is a major challenge for entrepreneurs all over the world regardless of experience and education. Indeed, there are a couple of ways through which you can finance your business such as through bank loans and getting venture capital financing.
That said, using the friends and family option still remains a valid and viable option through which to finance your business.
No matter the stage at which your business is at the moment you can make use of financing from friends and family, whether your business is a startup or a growing one.
Best Way To Get Funding From Family And Friends
Looking at the friends and family option, it involves getting finance for your business from your friends and family members.
Your friends and family members know you more than most people, therefore are in better position to know you and your credibility and integrity which you can leverage to get finance for your business.
However, because the people you are getting finance from are your friends and family does not mean that you should become less accountable.
Friends and Family Financing – What you need to Know
There are certain things that you should bear in mind while using friends and family to finance your business. Here are some friends and family finance advantages and disadvantages. Some of the points worth noting are;
- It Could be Debt or Equity
While getting finance from friends and family is valid for your business, it can come in two forms. It can come as equity financing or as debt financing.
When you are seeking financing from your family and friends and you use the equity option, it means your friends or family members as the case may be will get to own a piece of your business for providing you with finance.
While when you take the debt option, it means that you are basically receiving a loan from your friends and family, and this debt has to be repaid.
Although this debt financing option from your family and friends could come at no interest or at a low interest.
- Provide Satisfactory Explanations for Their Concerns
While seeking to get funding or financing from your friends and family you should be ready and prepared to provide answers to questions which they may have for you about your business.
Because they are your friends or your family members, do not expect them (friends and family) to throw caution to the wind.
Therefore, you should understand that if and when they raise concerns, you should treat it with the respect and attention that it deserves bearing in mind that some of them could be accredited investors with knowledge and investing experience.
- Repayment Schedule Could be Flexible
When the financing you are getting from your friends and family is debt financing, the repayment schedule could be flexible.
Because they are your friends and family members, they are most likely to offer you a flexible repayment plan than would a conventional lender like a bank.
This flexibility and advantage, however, should not be taking for granted. Ensure and endeavor to meet all repayments as at when due.
- Go for Documentation
It is sound business practice to document the terms of the financing you are getting from your friends and family. Even though this may not be a required condition to get the financing, it could be all that you need to prevent a disagreement in the future.
- Negotiate Properly
You should understand that you are seeking to get funds for your business and that every business has its own peculiar nature and applicable risks.
Bearing this in mind, you should properly negotiate the terms of the financing you are receiving from friends and family so as not to choke your business or deny it of most needed working capital.
- Ensure to Get Professional Help and Advice
While seeking to use friends and family to finance your business you should endeavor to seek and get professional advice from your lawyer, so that you can get proper advice on the implications of the family and friends financing option on your business.
Especially, as it concerns the ownership structure. Also, seek advice from your accountant and tax advisor to understand the tax implications of the financing on your business.
- All Parties Should Understand Their Level of Commitment
All parties to the financing should be clear on what is expected of them.
It should also be clear in the agreement, what is expected from each party in the financing and their level of commitment. It should also be clearly stated, the roles and limitations of all parties in the agreement.
Conclusion: Sources of Finance Family and Friends
Using friends and family is a right way to finance your business. But, however, while using the friends and family option to finance your business, you should bear in mind certain drawbacks to the friends and family option.
One major drawback to bear in mind is that financing from your friends and family if not properly managed could lead to a strain on your relationship with the ones you love.
To prevent a squabble, ensure all support or financing received from friends and family are properly recorded and documented and all documents duly signed by all parties involved.