Irrespective of the nature of the business you plan to venture into, funding is something that every business requires. Excellent business ideas are of little value, if you don’t have the necessary funding to bring the idea into fruition. Both established and start-up businesses alike, depend on cash supply in order to survive and thrive.
There are different ways to raise capital for your business. For example, you can save up your money, apply for loans from banks, go into a partnership, or seek support from family and friends. However, while some business owners see obtaining seed funds from family and friends as the smartest way to generate capital, other entrepreneurs see it as a death trap. The advantages and disadvantages of relying on friends and family for financial assistance will be discussed in this article.
So, let's look at some of the pros and cons of getting seed capital from family and friends.
Benefits of family and friends funding
1) It is an easy way to raise necessary capital
Ordinarily, your family and friends will know about your business ideas before anyone else does. So, to raise funds through this channel, you must be able to sell your business ideas so they will see the potential of the business. Also, your family and friends will always want the best for you, and supporting your business aspirations is one way to show they share in your vision.
2) The terms and conditions of the loan are not complicated
Before approaching a bank, peer-to-peer, or angel investor for a seed fund, you must be ready to face the reality of some not-too-friendly company policies, because they are business-oriented after all. However, getting loans and investment capital to expand your business operation from a family member or friend should not be anywhere near as complicated or stressful.
Anyone you refer to as family or friends must be ready to support you. So, if they are giving you a loan or getting equity in your business, you should expect a favorable policy.
Drawbacks of family and friends funding
1) Limited capital
Every business has the potential to succeed or fail. No matter how perfect your business plan is, you shouldn't expect your closest pals to empty their accounts for your project. Instead, your business plan should have multiple sources to fund the business. Sooner or later, you will need more capital, and this time, relying on friends and family may not be the ideal thing to do.
2) It can damage your relationship with your loved ones
To avoid damaging relationships, you should avoid the temptation of getting seed funds from friends or family. Suppose the business fails, or they feel they are not getting the expected reward for owning a stake in the company. In that case, you should be ready for a showdown that may snowball into a bigger crisis, such as court litigations.
While there are many advantages to seeking a loan from friends and family, the disadvantages may compel you to seeking funding elsewhere. The best way to fund any business is to have multiple streams to generate expansion or start-up.
Furthermore, business owners should strive to have enough funds to start up the business. If there is a need to seek an external funding source like friends and family, you must ensure the loan agreement is expressly written, and terms and conditions are clearly stated. Also, you should ensure to follow all terms and agreements between you and the lender.
If you believe you have a great idea for a new business venture, but don’t have the necessary funds, seek the advice of an experienced accountant who has experience in venture capital growth.
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