30 Sep 09 Loans and Investment From Family and Friends
Family and Friends Finance
Seeking money from your family and friends is a good way to finance your start-up business costs without the added pressure of a hard-investor looking over your shoulder. There are two main ways to deal with getting finance from family and friends and these are; as a loan or as an investment.
Family / Friends Loan – there are two loan types; a loan with interest and an interest free loan. If a loan with interest is made then both you and the lender will have tax implications. Typically a loan is the right choice if you only need to finance your start up business for a short period of time.
Family / Friends Investment – If your internet business needs long term funding then giving a share of your company for an investment from your family and friends is probably the best route to take. The form of investment should be based on risk capital (which means they might not get it back!). You will also need to look at what role you want them to play i.e. passive partner, active partner, or a shareholder. Find out more information on shareholders and company shares .
Benefits of Using Family and Friends
The financial benefits of utilising family and friends are fairly obvious as they tend to be more flexible than traditional lenders or investors and can be more amenable if there are any changes to the finance repayments, the business performance and changes in the economic climate.
Negatives of Using Family and Friends
The negative aspect of borrowing from family and friends really needs to be thought about, such as what if you can’t pay back the loan? What will happen if your internet business goes bust? How will your relationships with your family and friends cope with the added strain of a financial agreement that has gone bad for some reason?
If after you have weighed up the pros and the cons and you have decided that this avenue of raising your start up finance is the best option you will need to speak to your family and friends outlining clearly what you need.
Asking For The Money
When speaking with family and friends you need to be as clear as you would be with an outside investor . Communicate openly to them your business start up idea and e-business model which needs to show a realistic revenue model. Let them know the type of finance vehicle (loan or investment) you require. Be clear about the amount of finance required, over what time you need it and what payments you can make back (or amount of company shares / profit share your willing to give in the case of an investment), and use a set legal agreement which states the terms of the loan/investment clearly.
Family and Friends Legal Finance Agreement
Using a formal legal finance agreement can offer family and friends the security they might need to offer finance on a capital-risk basis for your start up business venture. Providing a legal agreement can also impress your professionalism and seriousness about repaying the finance, whether through loan repayments or company shares / profit share. It’s normally advised to have an independent person witness the signing of the agreement. It is also suggested to use a solicitor to tailor a legal finance agreement specifically for your requirements and those of your family and friends.
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your right,thats a good advise to avoid problem from the very start of the business.