During the early stages of a business, the founding team should discuss the startup’s funding strategy. Based on cost and revenue predictions, long-term funding needs can be projected. Mobile apps must spend $30,000/year in marketing to be a top earner. SaaS business models are unprofitable for the first 12-24 months of a given customer’s life. If initial startup costs are low for a first-time entrepreneur, friends and family financing should be considered. Part 1 of this two-part series explores the benefits of raising money from friends and family.
Funding is usually obtainable quickly due to your existing relationship.
Your friends and family already know you, so they can easily trust and have faith in your business venture. Investors want to get to know you before investing, and it can usually take a few months before you see any money. Another advantage is you do not have to go through the steps of applying for a bank loan, which could take weeks for approval. The loan process is simplified when asking someone you know. Typically you will receive the money once they say yes, but be sure to make things official by signing a promissory agreement.
If they can trust you, then an investor is more likely to trust you as well.
Family and friends funding is only the first round of funding for your company. Investors are more inclined to give funding in the next couple rounds if they see that the people closest to you trust you and are willing to invest in your idea.
Lower interest Rates
A huge and important advantage of borrowing money from friends and family is that it is very unlikely they will demand a high interest rate on a business loan. Of course, it depends on the relationship and the situation, but it is possible your family member may offer you the money with no interest rate at all. This gives you more money and allows you to focus on developing your business, especially since most lenders are hesitant to lend money to startup companies without a proven background and reputation. If these lenders do decide to loan you the money, interest rates can be very high. As with all business deals, make sure to put the deal in writing and make sure every party understands and agrees to the terms before signing the paperwork.
The investment terms are usually more flexible and potential exists for numerous equity or pay back methods.
It is important for all business loans, even those financed by family members, to be properly structured especially when it comes to the repayment terms. Family members may be more flexible and arrange more favorable repayment terms, whereas other lenders normally will not be. As stated before, make sure the terms are written down and understood to avoid any misunderstandings and disputes down the road.
They can give you the extra push that you need.
Knowing that your loved ones have invested in you, you may be motivated to do more than what is expected of you to be successful. Your family and friends will also most likely be more forgiving than other investors during your business ups and downs when it comes to repayment and
Download our free Raising Capital From Friends, Family & Founders eBook.
This book overviews best practices for raising money from the first people you go to — your family, friends & founders. Dealing with money in personal relationships can get a bit tricky. This guide will cover fundamental concepts, legal issues and material you’ll need. It will help prepare you for the difficult conversations and in some cases enable you to avoid them altogether.