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5 Things to Consider Before You Ask Your Family and Friends to Fund Your Business

Creativity and outside-the-box thinking are the two cornerstones of success in business. Profitable tech companies, such as Apple or Microsoft built their position on a highly competitive market thanks to innovative and user-friendly products. Other businesses, such as Amazon or Trader Joe’s rose above the crowd with their excellent customer service. And then there are those that looked at simple things from a different perspective and developed surprising alternatives to well known products or services, including Netflix with its take on movie streaming or Tesla with its involvement in the development and promotion of electric vehicles.

No matter what business model you decide to follow, you will need corporate capital to get started. You may apply for a business loan, try crowdfunding or dip into your personal savings, but you can also ask your family and friends to invest in your venture. If you lean towards the latter option and you don’t want your relationship to suffer, there are 5 things you will have to consider before you ask your loved ones to lend you the money to fund your business. Read on to find out what they are.

5 Things To Consider Before You Ask Your Family and Friends to Fund Your Business

Amount

Before you reach out to your family and friends to fund your business, you need to crunch the numbers. Decide whether you are looking for one time business loan, or maybe you would like to offer them a long-term investment opportunity. After that, calculate how much money you will need.

Be very diligent and consider all possible scenarios, as many business expenses lie in the details. Write down how much money you will need for the inventory, office rent, supplies and advertising. Knowing that, you will be able to assess who would be the ideal person that you could approach about the subject. Generally, it would be best if you could choose someone with business background, as they will know exactly what you are going through.

Business plan

A thorough business plan is the key to getting your message across. Your business plan should be clear, well-organised and structured. Do remember that you most probably won’t be dealing with professional bankers; therefore try your best to refrain from business jargon and preferably put everything in simpler terms. Doing that will make your addressees feel more comfortable and, consequently, less likely to reject your request. Prepare copies of your business plan for your potential financiers and give them enough time to go through it at their own pace.

Business plan

Pitch

Although it maybe easier to convince your friends to help you fund your business, than convincing a total stranger, you still need to approach the subject with the utmost professionalism.

Do not take your personal relations for granted. Instead, prepare a captivating pitch where you will describe your business model and ethics, as well as the risks that come together with your line of work. Do not hesitate to present your current successes, but also be honest about the failures or setbacks, so that your addressees can get the full picture of the state of your business. You will have to prepare yourself for a rejection, but when it happens assure your friends and family members that you do not take it personally.

Risk assessment

Your friends and family members may all have different risk appetite levels. Be up front about the risks connected with the investment and present your financiers with damage control plan just in case the things go south. Also, make sure that your prospective investors understand the risks to the fullest. You need to remember that your financiers are doing you a favour by funding your business with their personal savings, so be mindful, respectful and sensitive.

Business Paperwork

Paperwork

As soon as you reach the decision with your future investors, put all agreements and provisions in writing. A written contract will protect you and your counterparts from possible complications or misunderstandings. The agreement should be as detailed as possible in order to assure your family members and friends that you take this matter seriously, know your rights, respect your investors and appreciate their help. Such legal document should include full amount of money borrowed, interest rate, repayment timelines and reporting. Preferably, it should also state how are you going to spend the money and outline investors’ involvement in company operations.

If you have decided to ask your friends and family to finance your business, do follow our 5-step protocol for approaching your future financiers with respect and professionalism they deserve.


About the author

Alana Downer is a financial expert and a content editor from Learn to Trade, an educational resource for investors and traders. Deeply interested in all things revenue-related, and often shares her ideas online, writing about creating a profitable business, investing, trading, or establishing a passive income.


 

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Lynne Huysamen

Mommy to a pigeon pair, blogger and online marketer. Lover of chocolate, good books and buckets of coffee.

9 Comments

  1. I myself run my own social media business, and I had to invest in the beginning. There is always a risk when investing In something , however I think its a risk worth taking if you are willing to work for it. I completely agree with you that there are many things to consider before asking a family member or friend for an investment.

  2. Great article, but I couldn’t help but feel a tinge of sadness when I read your article heading…as the first business model that came into my mind was the MLM setup – how many have fallen into this marketing model’s trap and ended up losing money borrowed from friends and family?

    Doesn’t bear thinking about really, does it?

    Personally, I’m still a big fan of business plans – as I created two successful examples as a teenager in the 90’s. They may seem a little archaic to some, but they really do give the entrepreneur a more visual angle to sell their idea (and they still appear professional). 

    Do you feel that enough new entrepreneurs take on-board the reality of risk factors – something that’s easy to be over looked when the adrenaline kicks in and the need to ‘pitch’ arises?

    Great article. Chris

    • Chris when you MLM I get a shiver down my spine. It is not exactly my favourite business model to put it mildly. 

      I also find a business plan very helpful. 

      I feel that there are so many more amazing opportunities to earn online these days, but I also feel that there is a lot of hype surrounding MMO and a lot of scams and BS. 

  3. Great article, Lynne – you’ve brought up some points I hadn’t even thought of yet. This is a great method for determining what I need, and how, or if I should approach my family for a business loan. I think it might be better in the long run, to apply for a bank loan, rather than have my family invest… it just seems like it would be too much extra pressure to succeed.

    Can I ask, have you ever had family or friends invest in your business? Did it work out ok?

    Thanks! Erica

    • Hi Erica

      Yes I’ve had my father help me set up my business which was amazing, if only I knew then what I know now I would not have had to have so much help!. I initially set up an online store and had someone set up my website for me and I had to buy in stock etc. I didn’t know I could create my own website so easily and I didn’t know I could make money without any stock – I could market other company’s products through affiliate marketing and not pay a thing. 

      If I could do things over knowing what I know now it would be very different!

  4. Hi, Lynne.

    What a super article!  I had to go through all that when I was going to start a business.  I had to eventually get a loan from the bank to start off with, then took it from there.

    Luckily enough, with starting a business online, the story is a totally different thing, thank goodness. 

    With doing this, there is no risk involved, and one can basically start off with zero capital…and work from there, as opposed to having to owe thousands to the bank, or friends, or whoever was kind enough to help you out.  On top of that, there would also be interest involved, which doesn’t help matters in the least, especially more so if the business isn’t doing that well.

    James

    • James you are so right, an online business needn’t cost much at all to set up. The costs really are minimal which is amazing. 

  5. Hi Lynne,

    The truth is I prefer not to involve family and friends in my business, unless they show me “a lot” of interest. Normally “I look for partners” making publications on my site, making a general description of the business. Then and in a personal interview, I will have to have clarity with the numbers and explain all the risks involved. If the partner wants to advance, the corresponding corporate contract must be made.

    Claudio

    • Claudio yes I agree with you, including friends and family in business dealings is not always wise and I would be hesitant to go that route myself. 

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