Pin Me

Should Your Business Startup Funds Come from Family and Friends?

written by: Leif Holtzman•edited by: Michele McDonough•updated: 10/10/2009

Many people struggle to find the capital they need to start their business. A common strategy used by entrepreneurs is to ask family members for a loan. This article discusses both the positive and negative aspects of obtaining funding from relatives.

  • slide 1 of 4

    Obtaining Startup Funding

    One of the toughest parts of starting your own business is coming up with the money. Most first time entrepreneurs have absolutely no idea what they are getting into and often underestimate the costs involved in getting something up and running, not to mention the amount of investment that is required in order to turn a profit. While doing some market research and drawing up a good business plan can certainly help give you an idea what kind of funding you’ll need, finding investors can still be a challenge.

    While some startups are financed with capital borrowed from financial institutions, getting a bank loan can be next to impossible, especially for people with little or no collateral, a bad credit rating and no prior business experience. Even if your loan is approved, chances are the interest payments will make it difficult for you to generate a profit.

    It is for these reasons that many entrepreneurs turn to friends and family, when seeking funding for their small business. While this may seem like a great alternative to obtaining credit from a bank, borrowing from family definitely has its pros and cons.

  • slide 2 of 4

    The Advantages of Borrowing fom Family Members

    If you don't qualify for a loan and are having trouble finding outside investors to fund your business, you may need to consider turning to family for help. What follows is a list of some of the main reasons why asking your relatives to lend you money to start a business may be the right way to go.

    • Family members are generally more lenient than banks, and may not even ask you repay the money they lend you until you are ready.
    • Most family loans are interest free. You pay back what you borrowed and nothing more.
    • If your business goes sour, chances are your relatives will be understanding, whereas other creditors will do everything possible to ensure that you live up to your contractual obligations
    • Family members who invest in your business will want to see it succeed, so much so that they will probably do anything they can to help you make it work. Banks on the other hand are in the business of lending and won’t provide you with any assistance whatsoever, other than the initial loan.

  • slide 3 of 4

    The Disadvantages of Borrowing form Family Members

    Although borrowing money from family members may seem like the right choice, there are definitely some drawbacks that you might want to consider. Before asking your relatives for a loan think about these important issues:

    • Business owners that borrow from relatives are often pressured into listening to suggestions and advice that may not always be sound. Family members may even want to help you run your business or feel that their investment entitles them to make important decisions.
    • Financial disputes can have devastating repercussions and ruin personal relationships. If things don’t go exactly as planned you may end up causing irreparable damage to the bonds you have with your loved ones.
    • Borrowing from family may be detrimental to your self esteem. Many people who depend on others for financial support feel bad about the fact that they are not fully self sufficient. This lack of confidence can hurt your business as well as your feelings.
    • If your business does manage to succeed, your family will probably be just as thrilled as you are. Failure on the other hand, may leave you guilt ridden for a long time. Even if your relatives are understanding, you may find it hard to forgive yourself for not being able to repay them promptly

  • slide 4 of 4

    Conclusions

    How you choose to finance your business should depend on many factors. Theses include your credit rating as well as your ability and willingness to find outside investors. Before making a decision as to whether or to ask your family for money, it is best to consider all your options and think carefully about both the best and worst case scenarios. Borrowing from relatives may seem like a perfect solution to all your problems, but it can have its drawbacks as well. Whatever decision you make, do your best to ensure that it is a well informed one.