Asking Your Friends and Family to Finance Your Business? Here Are 5 Reasons to Reconsider

Asking Your Friends and Family to Finance Your Business

Finding an investor is difficult. How do all of these entrepreneurs meet perfect strangers who immediately buy what they’re selling? Why would they go out of their way to find and convince these people when they have supportive friends and family? In short, it’s because they want to keep their relationships with their supportive friends and family separate from their business. There are more than a few great reasons why you should rethink turning to your parents (or your school friends) for an investment.

[1] Their Money Doesn’t Come with Mentorship. All investments are a risk, and professional investors know exactly how to calculate that risk. They have business expertise, and they have a thorough understanding of what it will take for their money to turn into more money. Investors often take an interest in the smaller startups they invest in, sometimes giving helpful and worthwhile advice to the entrepreneurs they’ve trusted with their cash. Unless your friends and family are extremely business savvy, they may not be able to offer you the same unique skillset.

[2] You Can Hurt Their Credit. A lot of people turn to their friends and family for business loans because their credit is not good enough to secure a loan any other way. When you have bad credit, it’s still possible to get a loan even if the terms are less than ideal. Turning to your friends and family for a way to circumvent your credit situation might actually lead to their credit taking a hit.

If they’re living on a budget and they have financial goals they want to meet, giving you their liquid cash indefinitely might put them into a situation where they need to heavily rely on their credit in the near future. Consider the long term – if they aren’t constantly making an excess of money, waiting for a return on their investment might leave them in a bad financial position.

[3] There Are No Emergency ‘Outs.’ Though it’s a grim thought, it’s important to remember that most startups fail. This is usually because their founders are underprepared or their competition was too big to fail. Even if you feel like your plan is perfect, you need to consider what will happen in the event that you need to call it quits. Entering liquidation might make your business debts go away, but it won’t eliminate any individual loans you took out from friends or family.

[4] You May Not Need Funding at All. Not borrowing any money is the ideal scenario. Starting your business with your own money and with low overheads means you won’t have to answer to anyone. If things don’t go the way you planned, you won’t have to explain yourself to creditors. Start thinking creatively. Can you drastically reduce your startup costs by launching as a web-based or from-home business? Can you outsource work to independent contractors?

Start by getting your startup costs as low as humanly possible. It may not align with the broader vision, but it will in time. Just continually reinvest profits back into the business to see it scale into your dream. When money is an obstacle, patience can be an excellent way to overcome it.

[5] You Can Permanently Damage Relationships. This is perhaps the most important thing to consider: what will holiday seasons or special occasions be like if you took a lot of money from your friends and family and weren’t able to pay them back on time? How will you face these people who bought your vision and gave you their hard-earned cash – but didn’t get the return on investment you’d promised? When close relationships break down, it’s often over money. Your startup might be important to you, but is it more important than the people you love the most?

If you wholeheartedly believe in your business dream, you’ll find a way to achieve it without having to ask your friends and family for money. You’ll be in a position where you’ll be able to treat them to a great night out, and your relationships will be stronger than ever.

Laura Martins is a team leader and content creator writing on behalf of RateCity – financial experts, helping people make smart money decisions. Laura is a productivity freak, who enjoys learning new things, filling up work spreadsheets and listening to motivational speeches.