When you start your own business, the first source of capital should be your personal funds.
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This includes money you can personally put in and money you can obtain from family and friends (better known as your F&F network).
Family and Friends Investment Money
Money invested by family and friends is known as 'love money' and shows the outside investors how serious you are in the business you intend to start.
Why would you want to bother your family and friends asking each of them to invest small portions of their disposable income, if you can get an external investor to invest a huge amount into your business? Keeping aside the ego factor involved in burrowing money from people you know, this source of capital has a number of advantages.
- They are the most accessible source of funds, especially in the initial stages, when your business network is not strong and your business does not have a high past performance record to show to external investors.
- They are easier to convince to support and fund your business idea. In most cases, the interest paid in return is less than what a venture capitalist would ask for.
- You need not keep any security or guarantee to obtain money from them. Their trust on you acts as your guarantor. Also, you can repay the amounts at your own pace, depending upon your intimacy with the lender.
Many a times your family and friends have little or no knowledge about your business idea and agree to invest in it only because they have trust in your capabilities. Hence it is easier to misuse their money. This can not only ruin your relationship with them but can also jeopardize your credibility as a business professional. Hence think twice before putting your family into risk as their relationships need to be maintained for a life time. Also ask them only when you are completely ready to start the business and are in need of funds.
Once you have decided to ask your F&F network for money, prepare a list of people who could be potential investors. It is better to take smaller amounts from a number of people than burrow lumps of money from one or two of them and put them in a tight spot if your business goes bad and you are unable to pay on time. However, make sure to ask money only from those who have a disposable amount to lend.
Also borrow from those who will not give you a hard time because you owe them money!
After you have taken their money, you should make it your prime responsibility to fulfil their expectations. Give your lenders a maturity date for their invested money and ensure you pay back on time with a reasonable return on investment.
Have a contract or agreement signed by both parties. Make the agreement look as business like and legal as possible. Present to them the benefits and risks involved in investing in your business proposal.
Answer all their queries and accept their money only if they are completely willing to give it to you. If your business meets with some unforeseen mishap, and you are unable to pay back on the committed date, inform them well in advance and update the time limit.
If you are prudent enough, you can save a lot of time and energy looking for external investors, simply by taking a little help from your loved ones to kick-start your dream venture.