Most startups have to either borrow money or give up part ownership especially when they do not have all of the money that is needed. Most people automatically think of getting a loan from the bank. However, one option that some entrepreneurs do not think of, or even consider, is asking to borrow startup capital from family and friends. This is a viable idea but you should look carefully at both the positive and negative points before you make a final decision. One good thing about borrowing from family and friends is that you may end up with a very low interest rate. Many people will end up with interest free loans or offers when they ask their close family members. You should remember that this is a business proposition and you should treat it as such. This means that you should have a written contract concerning repayment terms and amounts and it should include at least a nominal amount as interest. Your family and friends already know that you are trustworthy so there is no need to worry about qualifying for a business loan. This method of finding startup capital can be very quick and will enable you to move ahead with your plans in a very expedient manner. There are also some drawbacks encountered when considering to borrow money from family and friends. Perhaps nothing can strain family relationships and destroy friendships more than money issues. One of the biggest concerns is what will happen if the business fails. You need to have a plan that addresses how you are going to pay back the money that you borrowed. If you are due to pay money back, you need to be able to make good on your promises. It may take longer than you expected, and even though they are family and friends, they may become unhappy if the payments are late. This can cause hard feelings. As the saying goes "never do business with friends." Another drawback that can happen if you borrow money from family and friends is that they may become a little too interested in the business. When people have loaned you money they often consider that they now have a personal stake in the business. This can be a major problem. You family and friends may press you for personal and financial information that you are reluctant to share. They may also come up with ideas about how you should run your business that are not in sync with the overall success of the enterprise. This makes the situation more awkward. You now have to deal with your business and with the interference of others, no matter how well intentioned it is. It is a good idea to have a business plan and proposal to present to anyone that you are considering as an investment source. You would then be able to present the facts to show everyone what they are investing in and what the dangers and risks are. By presenting this business plan to your family and friends just as if you were at a bank it conveys the seriousness of the venture and the professionalism. There are websites like prosper.com, lending club.com and virginmoneyus.com that will provide the information needed for business plans and agreements. Family and friends also need to know about the risks involved with the new business before they make any decision. If a family member or friend says no, it is not a good idea to keep asking them about the startup capital. If they are hesitant when you first approach them, you should find someone else to ask for help. Should the business struggle or fail, these are the people who would be the most upset because they would be quick to respond that you pressured them into the situation. Overall, borrowing money from family and friends can be a good way to start a new business. Borrow money wisely!
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