Submitted by Anonymous on Mon, 03/10/2008 - 10:48.

Attaining small business working capital from your friends or family is the source of business start up money. Despite the popularity of this funding alternative, there are many debates (and horror stories) on whether choosing this route is in fact a good idea. When borrowing from a family member there is a huge chance that there and it is difficult to determine at the time of borrowing how tight these strings will be pulled throughout the venture.

PROS

  • Easiest way to attain start up business financing
  • Extremely flexible and based on your needs
  • Most inexpensive way of attaining business loans (interest is usually lower if existent)
  • You don’t need to prepare a business plan (though it is still recommended)
  • No credit or financial background needed
  • Less timely procedures than any traditional means of attaining small business funding options

CONS

  • Problems if business does not perform as expected
  • Friends and family may want to own part of the business which makes the funds and equity investment that can carry a larger capital cost over time
  • Future of relationship may ride on success of new venture i.e relationship is at risk of being damaged or severed if business venture fails

  • Understand their motives
  • Explain the risk involved to your family
  • Make it a loan, not an investment
  • Focus on a repayment plan
  • Draft an official loan agreement
  • Research alternative business financing options – there are other alternative sources of funding that don’t have the high risk of destroying a relationship with a loved one.

Focusing on a might be the key to success for borrowing money from loved ones. This will ensure that both parties are protected and it helps draw the fine line between business and personal.

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