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Borrowing Money From Friends and Family To Start A Business

Asking for money from friends and family to start or grow your business may seem like a good idea. However, this strategy does come with risk.

When funds come from professional investors, they are well aware of the dangers associated with investing in startups and the reality that most new businesses ultimately fail or don’t perform as first expected is trite so they also understand that they may lose their entire capital.

The case is different with friends and family. The reason they are more willing to invest in your business is that they want your business to prosper and succeed and so are more willing to show you, by investing money, that they believe in you.

They might also hold themselves back from giving you unfavourable opinions. Moreover, friends and family are hesitant to enter into a binding legal agreement with you or get involved in any kind of paperwork evidencing their investment.

When things are stable in the first phase, everyone is happy, as you are able to secure enough funds to start your business. Things usually get complicated with every passing stage and many questions arise such as what will happen if the company goes through a crisis and you are unable to pay back the money.

Professional investors such as angel investors and venture capitalists understand business cycles and risks. They are better suited to dealing with the various challenges that confront a business and are there to support you in the right way.

How you spend the money you raised, who you hire, suppliers you use and the customers you target need to be independent of your investors. Too often, family and friends who get involved as investors try to influence key decisions that may affect a business’ operation. What you decide to pay yourself may also come into question when family and friends are involved.

Furthermore, if things get complicated and if disagreements arise between you and friends and family investors, then it may become difficult to raise further capital from professional investors such as angel investors and venture capitalists in the future.

If you do decide to raise capital from family and friends and see it as the only option available to you, then it is advisable to ensure you have your paperwork done correctly, with agreements and terms clearly outlined. Treating it as a business transaction from day one is the best way to set your expectations early on how you plan to operate.

Understandably, you will be excited and passionate about your business and will want family and friends to share in your excitement, however informing friends and family of the risks involved with investing in your business will also allow everyone to have a clear understanding of what they are getting involved in before they part with their hard earnt money.

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