If you don’t have enough funds for your start-up business, you may borrow money from friends and relatives. Interesting, however, although the majority of informal investors, family and friends, is often willing to supply funds at negative returns, most prospective business owners will only as a last resort consider borrowing money from them 1.
Nevertheless, to borrow money from friends and relatives is after bank loans the biggest source of small business financing in the UK 2. There is however a certain way to approach friends and relatives to borrow money from them.
How to borrow money from friends and relatives
Tony Armstrong suggests in Nerd Wallet the following do’s and don’ts when you want to borrow money from friends and relatives to start your business:
- Know what you’re asking for – Do you simply want a loan, or are you offering your family member a stake in your business for their investment?
- Provide a business plan – That means you should provide your family and friends with a thorough overview of your company in the form of a well-crafted business plan.
- Don’t hide the risks – When pitching your business idea, be open and honest about your venture. There’ll be risks involved for anyone extending you money, and it’s up to you to explain that to them without bias.
- Put it on paper – Even if you’ve come to an agreement with your parents, and regardless of the sum of money involved, be sure to put everything in writing.
- Don’t let relationships suffer – It’s up to you to make sure that your business partnerships don’t hurt your relationships with family and friends.
Involving friends and relatives with your business can be of huge advantage for you as prospective business owner. Not only may they be a source of start-up capital, but they may have business skills and knowledge or other entrepreneurial characteristics that you haven’t been aware of. For that reason it is important choose your friends and relatives wisely…
Remember, you need a well researched and written Business Plan to get your business off to a good start!
- Using Personal Savings to Start Your Business;
- Getting Money for Your Business – Other Individual Investors;
- Borrowing Money from a Bank to Start your Business
- Bootstrapping – starting a New Business with Your Own Money
1 Lee, S. and Persson, P. 2016. Financing from family and friends, The Review of Financial Studies, 29(9):2341-2386.
2 Basu, A. and Parker, S.C. 2001. Family finance and new business start‐ups, Oxford Bulletin of economics and Statistics, 63(3):333-358.