Funding from friends and family; it is one of the oldest and most reliable forms of financing. It is traditional, simple, and does not require going to a bank. And when the time comes, you will probably consider asking your friends and family to fund your business, at least once.
Some say it is the most unadvisable thing you can do; others say it might be the smartest first step you can take. Needless to say, it is an extremely controversial idea.
But let us break it down. What, truly, are the advantages of friends and family financing? What are the disadvantages? Will it work for you?
Unsurprisingly, asking your family and friends for a loan is the easiest money you will get. You do not need to check your bank statement or go down to the bank or put something for collateral. As long as they believe in your idea and your abilities, they will want to help you.
Because they only want to help you, your friends and family will probably give you loans at the best of terms. The interest rate will be low, the shares, perhaps, might also be small. Any agreement you settle might be the most beneficial one you will ever get.
The thing about getting funds from your family and friends is they are not going to hound you for their money. They are not going to slap you with an eviction notice or take away your car. They will support you through the tough times and be lenient when you fail to break-even or struggling through the quarter. Their kindness will help, not hurt, as long as you do not take advantage of it. It just might make all the difference in the world.
They do not tell you to keep relationships and money separate for nothing. When you mix these two things, it can complicate ties quickly.
Your relationship might sour if you do not pay them back on time or your business venture fails. Similarly, if they refuse to fund more of your business ideas, it might cause friction, as well.
The pool of funds you get from your friends and family is not going to be much. It might last for a couple of months, sure. But sooner or later—especially if your business start picking up—you will need to consider other sources of funding.
Financing is a complicated tangle of webs, with worrying implications in the future. If you give out a lot of shares to your family and friends at the start of your business and think better of it in a few years, you cannot take it back. If you go into a lot of debt, that might put a strain on your relationship, too.
Well, there you go. You have all the information now. Whether you choose to go through it or not, is entirely your choice. But we do hope we have given you all the information to make an informed decision.