Asking friends and family to fund your new business is a great idea. While we will get into more depth as to why that’s the case, we should mention that this is also a very common thing among entrepreneurial circles.
According to the US Small Business Administration, there are more than 31.7 million small businesses in the US. These businesses have to fund ways to secure funding, otherwise, they’ll fail before they even launch a product. A large portion of new businesses do look towards friends and family for funding.
So if you’re interested in why you should do that, then this is the article for you. So with all that said, let’s start.
The single biggest reason why you should go ahead with it is the fact that you’ll be much more flexible with repayments. When looking at other means of securing funding for your startup, they come with interest rates, promises, and more.
The true nature of entrepreneurship is something that everyone values; even your friends and family. Everyone knows starting a business doesn’t come without its risks, and everyone knows that a business can easily go bust.
Looking at it from a surface level, most businesses go bust before they turn 10 years. While 10 years is a long time, 20% of businesses fail in their first year, according to the Entrepreneur. A large reason for that is failing to secure funding for business operations.
So if you cannot take out a bank loan, find an angel investor, or your crowdfunding campaign fails, asking friends and family is the way to go. We even recommend doing this in the first place as it is more flexible. The reason why that’s the case is that friends and family will understand that you might not be able to repay in the first year.
Thus, they might be more understanding if your business starts losing revenue.
The second reason why you should approach friends and family is that they are more willing to give you an interest-free loan. Even if this isn’t possible, you will likely agree on a significantly lower interest rate. This rate should be much lower than what the bank would give you.
We should mention that this won’t be the case with every entrepreneur. Some family members will be less hesitant to give you money to fund your new business. They will likely ask for some form of security in return. But it’s safe to say that negotiating with friends and family is more stress-free than dealing with the bank.
Longer Repayment Period
Another reason why you should ask friends and family for funding is that they might be willing to give you more time to repay. Many entrepreneurs dream of becoming business owners. But sadly, new businesses face unimaginable challenges to stay afloat.
When that’s the case, the need to be given more time to repay business loans is necessary. And considering that friends and family might be more willing to give you more time, it is exactly what you need to manage the sea.
A Business Plan Isn’t Necessary
Make no mistake about it, every entrepreneur needs to come up with a business plan. A business plan is the single most important document a business needs to attract investors. Not only that, a business plan details everything related to the business. From how it plans on making money to where it plans on spending it and how no business can survive without this document.
But it’s safe to say that creating a business plan is rather difficult. Not only that, many business owners don’t know how to put everything in writing. So when that’s the case, it can be quite difficult to acquire funding. But not when dealing with friends and family.
Yet another reason why you should approach your friends and family for funding is the fact that you might not have to show a business plan. You can get together over a cup of coffee and explain to them why investing in your business is a good opportunity.
While an angel investor will instantly dismiss you, friends and family will be more willing to hear you out.
How To Approach Them?
So now that you know the reasons why you should approach friends and family, how do you do that? Even if securing funding from friends and family is easier, that doesn’t mean they will give you the money. In most cases, you will need to detail some aspects of your business.
Thus, you will need to be crystal clear about what you expect from the business. You also need to be completely honest about why you need the money. Explain when you plan on repaying, and what they’re going to get in return.
Do you plan on offering them a stake in your business in return for investing or is this a loan-type of funding? Regardless of it all, you have to ensure some trust so make sure to also put the agreement in writing.