Raising Money

Borrowing Money from Friends and Family

Written by Stefan Martinovic for Gaebler Ventures

Borrowing money from friends and family is a tried and true way to start a business but before you do it, be sure to read this article.

For most small companies and startups, banks, venture capital firms and angel investors are the first thing that comes to mind when considering funding options to get the business off the ground.

Borrowing Money from Friends and Family

What many business owners don't consider, however, is that there are ways to raise capital without stretching your credit to the limit and without a flawless business plan.

Friends and family can often be a good resource when seeking initial funding for your company. The people that know you and trust you the most are many times the most logical choice to help you get started.

Before approaching family and friends for money to fund your business, it is important to ensure that they have the financial means to make a worthwhile contribution.

It is rather crass to ask everyone you are acquainted with to sink $100 into your company, so tapping into a small group of friends and relatives who have capital available is usually your best bet. This gives you the security of dealing with a smaller group of individuals and gives you the peace of mind that your business will not be a financial burden on people that you care about.

When approaching loved ones for capital, it is important to appeal to their business sense and in many ways treat them as if they were any other investor.

While you may have close personal ties with these individuals, incorporating them as investors in your company certainly changes the dynamic of your relationship. Friends and family members care about you and the success of you and your business, which makes them a valuable resource. You must stress to them that this loan will be a business transaction and setting ground rules such as a repayment plan are vital to maintaining their confidence in your endeavor.

Regardless of how close you are with the people you will be borrowing money from, the simple fact of the matter is that money changes people. It is possible that personal complications can arise from their involvement with your company.

As a friend a business owner, you have to remember that not only are these investors in your company, but also people that you care about on a personal level, and you must do your best to keep your obligations to them. Having a bad transaction can lead to personal complications, as you are sure to encounter your friend/investor on a fairly regular basis.

The most important thing to keep in mind when borrowing money from friends and family is confidence. You are confident in your business. More than likely, your friends and family have backed you in your rise to success thus far.

Bringing them into the fold as investors is all about inspiring confidence not only in you, but that your company is a wise investment in the long run. This affords them the dual satisfaction of helping a loved one in need and making a wise choice with their money.

Stefan Martinovic has an extensive body of work across the financial services, manufacturing, and retail industries. He is currently pursuing an MBA in Management and Entrepreneurship at The College of William & Mary.

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