Many startups struggle with financing their small businesses. With the average cost of starting a business approximately $30,000, most entrepreneurs need to seek some source of funding beyond their own coffers. For some, borrowing money from friends and family may be their only option.
According to credit analyst and volunteer SCORE Portland mentor Matthew Buonopane, “The five Cs of credit are of primary concern to banks when lending to businesses. These C’s include: character, capacity, capital, collateral, and conditions. While character, capital, and conditions may be in place to the bank’s satisfaction, collateral and capacity, or a history of good operating performance, are often absent or difficult for small business owners to obtain.”
Using funds from relatives and friends comes with unique risks and benefits, so carefully consider the pros and cons before asking Aunt Jane to float you a loan.
- Borrowing from friends and family may give you quicker access to cash. They probably won’t demand as much documentation about feasibility and your business plan before helping you financially.
- You may have more flexibility in setting the payback arrangements so you’re not feeling strapped or overstressed as you start and grow your business.
- When friends and family invest in your business, you may find they have an abundance of enthusiasm about your endeavors. Having their moral support and encouragement can keep you motivated and optimistic.
- If your business fails or hits hard times, you risk hurting the financial security of those you love if they extended themselves to support you.
- Borrowing from loved ones may cause your relationships to become strained if your near-and-dear lenders feel—since they loaned you money—they have a right to tell you how to run your business.
How Can You Borrow To Build Your Business Without Breaking Trust
First and foremost, be upfront about the risks and challenges involved in starting a business so your friends and family know what they’re getting into.
Also, consider these other tips before you accept funding from them:
- Conduct research and do your due diligence before asking for money. Do you feel confident your business will succeed? Ask yourself, “Would I invest in this business if someone asked me to?”
- Be realistic when considering what funds your business will require. Get a good handle on the costs your business will have to cover so you’re asking for an amount of money that’s in line with your needs.
- Determine if the funding will take the form of a loan or a share in your business.
- Craft a contract and lay out a payment plan. This will ensure you and your friend or family member are on the same page and have the same expectations.
Get Help In Considering All Options
Even though you may think borrowing from friends and family is your only option, there may be other viable funding resources that you’re not aware of. By contacting SCORE and setting up a time to meet with a mentor, you might learn about alternative financing opportunities. Reach out to us today. Mentoring is free of charge, and our mentors have experience in all aspects of starting and growing a small business.