Business Start Up Funding: Raising Start Up Capital

Raising Start Up Capital - Involving Friends And Family

By Business Editor

Although friends and family may seem the natural first choice of people to approach when it comes time to raising startup capital for your business idea, there are some downfalls and risks that you need to know about, as this article explains ...

When you have a great idea and are thinking of starting up a business, friends and family are the people who have probably heard the most about your potential venture. When it comes time to raising start-up capital, these same loved ones can be the first people you turn to if you haven't set aside enough money to get your business off the ground. Borrowing from friends and family might seem like a fairly good option as well, because these people care about you and have an interest in seeing you do well and be happy. However, making deals with people close to you has some downfalls and risks that might jeopardize good relations.

You'll have to decide if your close ones will be buying equity in the company or whether the loan is cash only. There are pitfalls to either option, and no matter which one you choose, friends and family who invest in your business will always feel they have a say in your decisions and actions. You can give those who invest some legal decision-making rights, but even those who lend you cash will feel that your decisions need to increase your ability to repay loans. Friends and family will have opinions about your business and how you run it, which might seem like second-guessing or heavy studying on their part.

You must also consider the what-if factor. Some people are hopelessly generous and optimistic about investing, until something happens in their own lives that changes their financial picture. How will you handle it if Aunt Suzie suddenly needs that $10,000 to pay a medical bill, and you are unable to repay her? Be sure that your investors can take the financial loss in the event that the company fails and you are unable to repay the loan.

Open and honest discussion about the money, and the investor's ability and willingness to permanently part with it, can go a long way toward preventing permanent damage to relationships in the event that the company fails. However, this is not the only consideration. If you choose to sell equity, then you must also have a frank conversation about the company's future. There have been cases of investors blocking potentially lucrative deals because they were not comfortable with the risk involved. Make sure that your investors are on board with the way you plan to develop the company in the future. A business plan can help in narrowing your focus, and provide your investors with an understanding of your goals. Review it with investors you know just as carefully as you would with a banker.

Always remember that the people you've entered into a business relationship with need to be treated with respect and professionalism, and you should never take the generosity of friends and family for granted. You still need a written agreement, even if relations now are very close. What's more, if you do accept funding from friends or family, be sure that their views and opinions about your new business mesh well with your own. No matter what happens with your business, your investors are friends and family first, and you should maintain good terms with these people.

Next article: Business Start Up Capital - Common Questions

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