Family and Friends Financing

Friends & Family - Asking friends and family for money is also a route to take when starting your business. If the business fails, you run the risk of damaging these personal relationships. If you do decide to involve family and friends in your business, you can either ask them to give you money in exchange for equity or ask them for money as a loan. Either way, they risk losing their investment if the business fails. If they lend you the money, you’ll want to create a promissory note that details the terms of your agreement. The terms can be set up between you and the other party any way that is agreeable to you both: interest percents, length of repayment, etc. If they invest in exchange for equity, outline their investment and involvement in your operating agreement.

Pro:
Friends and family members want to see you succeed. The interest rate on the offered loan will typically be less than that of a bank loan because of this relationship. Creating a business proposal and presentation is typically unnecessary, although important in any start up. Ironing out the details will be difficult, but worth it in case the business does not succeed.
 
Con:
The relationship itself will be strained, regardless of profitability or marginal gain. Without detailed plans and contracts, legality issues can arise. If the idea is extremely risky, the investor will typically invest anyway, creating more pressure. In the event that the company is unprofitable and the investor loses the seed money, the relationship will be left strained. Prepare for uncomfortable family reunions.
 
Resources:

PROMISSORY NOTE

 

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