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Obtaining Funding - Friends and Family

Raising Capital

Obtaining Funding - Friends and Family

Written by Rodney Miller for Gaebler Ventures

When deciding to start a company it is important to have enough funding to become operational and to get through the slow times. This article discusses the benefits and disadvantages to using friends and family.

This is part one of a four-part series I have written on obtaining funding for a startup company.

In this first article, I will specifically address raising funds from people you know.

We have all heard the old saying, "Never borrow money from family," or even "never go into business with friends". While this might be decent advice for some, it may in fact prevent you from succeeding in business.

When starting a company, a big reason for fast failure can be undercapitalization.

If you don't have enough money to get established and float through the slow times that you will no doubt experience, then you may never make it through to experience the prosperous times.

With that in mind, don't overlook any funding resources that may be available to you.

Family and friends will usually be more than willing to listen to your plans and even help out if they can. If you don't feel comfortable using their money, especially out of fear that it may ruin your relationship, try to use their labor or expertise. This can help free up some of your capital from other sources.

For example, if your uncle is an accountant, he may be willing to help with some accounting services and that could free up several hundred dollars a month for operating cash flow. If you have a friend who is an attorney they may be willing to help set up your LLC or other entity and that could potentially save you thousands. This money could be the difference between making rent for a month and coming up short.

Another thing to consider is the amount you are borrowing from family. If your business plans include a startup large retail store and you need several hundred thousand dollars, friends and family may not be the answer. Even if someone is willing to invest, the risk may not be worth considering.

On the other hand, let's talk about a scenario in which your startup is a low overhead, home based operation that requires only $1,500 in equipment. In this case, the effects on your relationship in the event of business failure will most likely be much less severe than if the previous venture I discussed had happened to fail.

In conclusion, don't always ask friends and family for money. If there are services that you need, try to outsource those services to family and friends, at least for a while. Ask them to do it for free and give them some upside in return...either a piece of the business or a promise to repay them in the future when the business is up and running and cash flows are positive.

At the same time, if you need a small amount of money in order to become operational or stay afloat, don't overlook family and friends either.

However, tread lightly because the last thing you want to be without if your startup doesn't work out is your support system.

If friends and family can't give you enough startup capital, you may want to learn about raising money from venture capitalists, which I discuss in the next article in this series.

Rodney Miller is an experienced entrepreneur who likes to write about entrepreneurship. He has started numerous businesses, including a tanning salon and a landscaping company. Rodney is currently studying business management at Park University.