Best Practice: Full and open disclosure is important when raising capital from family and friends. Always do it in writing with signatures.
Today’s Article: Access to Capital for Branding: Family and Friends
Family and friends are one of the first ways an entrepreneur may seek outside capital. Raising money from family and friends is easier than going to a bank, microloan organization, or angel investor. With family and friends you have an established relationship and they are not going to run credit report.
If you value your family and friends relationship, it is recommended to create a business plan and review the plan with them prior to accepting the capital.
When raising capital from family and friends, always present the business’s upside and downside (losing their capital). If they provide you capital: is it a gift, no interest loan, interest loan (what are the payback terms) or are they buying into the business? This arrangement needs to be clearly spelled out in writing and both parties need to sign the agreement.
Advantages to Capital from Family and Friends
1. It is a source of money to start or grow a business
2. The money may be easier to get then going to a traditional business lender
3. The money may be quicker to get versus a traditional business lender
4. The money may be acquired with a lower payback interest rate versus a traditional business lender
5. The money may be acquired with a longer payback period rate versus a traditional business lender
6. Acquiring the money usually does not require running a credit check and report
7. Acquiring the money usually does require as much collateral to back the capital
Disadvantages to Capital from Family and Friends
1. Capital from family and friends can change the nature of your relationship*
2. Capital from family and friends can create stress in the relationship*
3. Capital from family and friends can create problems when things go well. They may now see themselves as business partner versus a lender*
4. Capital from family and friends can create problems when things go poorly – loss of capital and they want their money back*
Action Step: Review family and friends as a possible source of business capital. How much money would you need? Would it be a gift, interest free loan, interest loan, etc.?
*Note: When securing money from family and friends always have the arrangement clearly outlined in writing and signed prior to accepting the capital.
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