Worldwide, the majority of new entrepreneurs get at least half of their small business financing through friends and family. Generally, it far exceeds any funding by investors or commercial lenders. However, accepting financial help from those you care about the most should not be considered lightly. According to the well-know quote by William Shakespeare, “for loan oft loses both itself and friend”.
Likewise, other experienced entrepreneurs will warn you not to go into business with loved ones. Even in the best of times, relationships are a challenge. But, make a mess of a relationship over monetary issues, and you both could lose something that money cannot buy.
So, before you even go knocking on any doors to discuss your business, you really need to carefully consider whether you should ask in the first place.
As you are contemplating the pros and cons of talking to friends and family about money, you need to first ask yourself 7 very important questions:
1. Do they have the money?
You are not omnipotent or all seeing. Are you sure your friend or family member has the money to invest in a small business. At one time they may have seemed flush with cash; but, maybe times have changed. If you ask and your loved one does not have the money, or it is already earmarked for something else, it may put a strain on your relationship to even bring it up. No one wants to feel like the bad guy and have to say “no”.
2. What if you lose the money?
Despite best efforts, there are never any guarantees when you start a new business. It is a gamble any way you look at it. You can do all the preplanning and analysis known to man, and then the market turns and your dream hits the skids.
So, do you friends and family understand that there is no way to promise they will get their money back and then some? If they lose their investment, will it adversely affect your relationship? Can they do without that money forever, if things do not work out?
3. What is your attitude about the money?
Be honest! Do you feel like you are entitled to that money? If you ask your parents for the capital to start your business, is it going to cause problems between family members? Are your siblings going to be upset, if you get a handout and they do not? Even if you feel like your parents owe you money, they may not have it to give.
4. How will you pay it back?
Every new business goes through periods of famine, when there is more capital going out than coming into the business. If times are tough, are you going to treat friends and family like a creditor and make the agreed upon payment; or, are you going to let payments slide because they will not destroy your credit like a commercial lender? You will need to get it in writing as a contract. Make the transactions legal, so loved ones do not feel like you are simply taking advantage of their generosity.
5. Could you permanently lose a friend or destroy family ties?
Many relationships have been destroyed over money. Is it worth the risk? What if your friend or family member does not truly understand the nature of the loan? He/she might assume that in a year’s time there will be a substantial return on their investment. If it doesn’t work out that way, will feelings be hurt beyond repair? You must count the cost. It has far-reaching consequences beyond the money.
6. What is the money?
Is the money a gift? Is it a loan? Is it your Inheritance given while you parent(s) are still living? The source of the money should be very clear. Then, make sure to get the transaction all down on paper. Even though it comes from a friend or a family member, use legal documentation. Whether it is a week, a year, or 20 years from now, there should be no question regarding the money.
7. Are you going to protect their investment?
When it is your own money you invest in business, you can spend it as you see fit. However, if you are taking money from friends and family, are you going to protect their money to the best of your ability? In other words, are you going to be a little more careful how you spend the money? In fact, it may be a good idea to have an itemized list on how their small business investment will be spent. Is it to pay employees, buy a new piece of equipment, and increase the inventory or something else?
Before you borrow money from friends or family, be sure to count the cost. It could mean a lot more than simply returning their money and giving them a good return on their investment. A small business loan or an entrepreneurial investment is not worth risking a loving relationship. So carefully consider small business financing from friends and family.