The average cost to start a business is $30,000. In addition, starting a business has proven to be a challenge for many; young and old. What are beginning entrepreneurs who face this situation supposed to do? Well, many have utilized “friends and family” as a financial source. Why not; some may ask. Friends and family normally have their best interest at hand; they tend to be very trusting when it comes to lending and investing in the new entrepreneur business venture.
For example, Paul Graham the Vice President of his work on “Lisp” which eventually became the Yahoo Store; raised $10,000 from a close friend. However, Paul Graham really thought about this decision before executing it. His friend not only knew him well; but he was also wealthy and a lawyer. Likewise, Paul received funding and access to free legal advice.
It’s important to research the advantages and disadvantages of accepting a “family and friend” loan. There could definitely be potential risks and/ or blessings when completing this type of transaction.
Let’s begin by discussing the advantages of “Friends and Family” funding
1. Your friends and family know you personally. They are less likely to judge your funding request based on your personal credit rating or business credit score.
2. Your family and friends will give you time to develop the business vision; because they want you to succeed; likewise, their terms maybe more favorable than those offered by financial institutions; most likely will not be as demanding on your financial projections as a professional investor
3. Your family and friends funding will assist you in requesting funding from professionals in more prestigious valuations.
Next discuss the disadvantages of “Friend and Family” funding
1. You may end up in a heated lawsuit and break up family and friend relationships if or when things become challenging.
2. They may not be able to bring wisdom, experience or resources that could enhance your business – they may begin to just be in the way.
3. If you receive a significant amount of funding; you could be potentially putting your “friends and family” at risk of losing everything.
4. You may put the people you love best at risk, if they are giving you a significant portion of your savings
A few great pointers to consider and/ or to keep in mind are:
1. Just as Paul Graham, Vice President of YahooStore did; choose someone with solid business skills; one who understands legal issues as well as any risk and benefits that could affect you.
2. Demonstrate your passion and diligence for your business venture; take the time to research your idea before you present and request funding from family and friends. This will show them that you are serious, thorough and passionate.
3. Create a legal agreement or contract with “family and friends”. This will ensure all expectations are spelled out and everyone is on the same page. It will explain issues such as how funding will be used, how progress will be measured, and how repayment will be made.
4. Be realistic about the amount of funding needed; this is why it is very important to complete research beforehand. You must remember that this is still someone else money; and they deserve and expect to be paid back like the bank would require. Asking yourself questions such as:
a. How much money is needed to implement your vision?
b. How much money do you need to pay employees, buy inventory, and keep the lights on.
c. How much money do you need for your salary
5. You may reduce your funding obligation to any single person by asking multiple people for smaller sums. But, remember to keep track of each person and collaborate consistently with each individual.