Raising Money From Friends and Family: Tips, Pros and Cons
This type of financing means close and trusted friends and family relatives help raise funds for the initial investment in the business. It cannot be the only form of investment, because it is limited and most of the time cannot fund the whole organization. However, it is the surest, fastest and most common means of gathering funds for upcoming businesses. You must know that family and friends financing is different from debt financing or a loan from banks or other investment schemes.
Essential tips when approaching family and friends:
1. There should be a well-written formal agreement.
2. You should be sure no investor will have any form of financial liability for the business.
3. You should be sure of when you will be able to return the money.
4. The duration of the business should be known.
5. There should be clarity about your expectations.
6. There should be an agreed mode and time of payment.
7. It would be best to think twice before approaching your confidant, and think of other sources.
8. You should be sure of the share or profit that will be allocated to investors.
The advantages of financing from friends and family: they can lend you money at a low or no interest rate. The payment method may be flexible compared to banks. They may lend without collateral, since they know you. You will be placed on favorable terms and conditions compared to other schemes or policies, though a little detailed business plan will still be needed.
The disadvantages: disagreement over the deal can destroy relationships. The time frame, when they are ready to collect their money, may not be conducive to your business. They may wish to poke their nose into your business, which is not proper. And the business deal may be tedious.