Raising capital from relatives and friends

By Leah Karimi

Sourcing capital to start a small business is not an easy task for the unemployed person.

This is where the need to seek financial support from the people who know and love you becomes paramount. That means approaching the ‘two Fs’ – family and friends. But, these form of business finance has many advantages over other types of financing.

Family members, friends and acquaintances are more willing to invest in your venture because they know you and like you. They are less likely to scrutinise everything in your business plan, or to demand a high return on their investments.

Lurking danger

On the flipside, it creates personal and emotional issues that go beyond business judgement. These could include personal embarrassment, misunderstandings on what the friend or family member expects in return.

While you may think it is a loan, which you will repay in time with / without interest, your friends or family member’s may look at support as an investment for which they expect to receive stock or an ownership interest in your business.

Since that initial confusion may have bad consequences, you must uphold discipline after sourcing the funds. As a guide to getting through the rigorous task try these basic rules:

Tight schedules

By avoiding commitment to a repayment obligation, you should forget that your investor is a friend or family member if they are advancing you a loan.

Have your lawyer prepare a promissory note in which your business promises to repay the loan when it is capable of doing so without a fixed repayment schedule. This is important because those who become investors may start acting like business partners, whether legally entitled to or not. You will need to treat them with care because you will have to face them during social occasions.

Remember, when friends and family members become investors there are two relationships going on: A business and a personal one.

Therefore you should avoid the possibility of fallout if the business collapses.