In the early startup stages, businesses without collateral in the form of physical or intellectual assets can have a tough time attracting investors and lenders. Many business owners turn to family members and close friends to raise money to fund their business.
The process of asking friends and family for a business loan can be complicated and sensitive. Some considerations before you make an approach are outlined below.
When Should I Reach Out to Friends and Family?
Friends and family are often the first people small business owners you turn to when you need funding is needed. They can invest in your business at any time, but they most commonly come aboard during the early “pre-seed” round. The size of their investment can be small, but early.
Capital can translate into a new storefront, office equipment, and other supplies. It can even help turn your idea or minimum viable product into market-ready goods.
How Should I Reach Out to Them?
Contacting family members and close friends directly is the usual first step. Social media may also help you to connect with other investors who may be a couple degrees removed but still within your circle of friends and family. Early capital can often come from friends of a friend.
How Do I Pitch to Friends and Family?
Dealing with family and friends can feel very different than approaching a professional investor, but you should be prepared to present your investor deck, pitch deck, financial statements, business plan, and any other relevant materials that outline your business’ road map and goals.
Presenting the reasons why you need capital and how you’re going to turn that investment into profits demonstrates respect for their trust and their money.
How Do I Manage the Relationship After They Invest?
Treat your friends and family with professional respect, as you would with any investor. Put all financial agreements in writing. If you have family and/or friends who have business experience, ask them for advice and guidance.
What About Potential Pitfalls?
By putting all agreements in writing, business owners can use those agreements as a guide for establishing boundaries with investors who are also friends or family members. In addition, having written agreements can reduce the possibility of later misunderstandings.