The Pros and Cons of Friends and Family Financing
When it comes to starting a firm, the first thing that comes to your mind is arranging finance for the company. While there are different approaches for acquiring funds, it is important to choose the most promising and high-yielding one. For launching a business and sometimes during its initial stages, friends and family financing works as a basic approach. There is a mixed conception regarding this funding method. Some don’t even consider it a good idea, while others simply rely on it completely. So, it is more of a personal choice to choose or not to choose friends and family financing.
It is important to measure the merits and demerits of this financing approach to make a well-informed decision.
What Are Friends And Family Financing?
Before filtering the advantages and disadvantages of friends and family financing, it is important to understand what it is. When you seek funds from your family members, friends, colleagues, or anyone you are close to, it comes in friends and family funding.
We all have personal networks that come in handy in the time of need. Similarly, when you are starting a business venture, this network might help you in raising some initial funds.
It is important to understand that friends and family funds can come in different figures with varied conditions. So, you must be able to keep an account of that.
What Are The Pros Of Acquiring Funds From Friends and Family?
Pros of family and friends financing can be many that will encourage you to go forward with it.
#1 Easiest Approach To Raise Money
No need to draft a pitch deck or prepare a compelling speech to impress the investors. All you need is to make your friends and family believe in your idea. It is by far the easiest method to raise money for your business. Probably your friends and family don’t even know what you are doing. Still, they will help you monetarily to see you grow as an entrepreneur. You can easily make your loved ones show interest in your business compared to professional investors.
#2 The Best Financing Terms
Your friends and family will hardly ask you for profit margins of equity shares in your company. That’s the reason friends and family funding have the best financing terms. It is not necessary to ask for funds without any agreement, but compared to the investors, you will get a steal deal with friends and family. There are many friends who have later become partners in the company after the initial investment. So, instead of struggling with the loan sharks or stubborn investors, you can seek help from your loved ones.
#3 Take It When You Need It
You cannot keep asking venture capitalists for money whenever you need it. However, with your friends and family, it’s exactly the opposite. You can take it when you need it. You don’t need to make any one-time financial projections; your friends and family will be lenient enough with the funding. If you don’t pay the loan interest on time, your bank will take serious action against you. But your friends and family will not make you struggle during your hardships. Whenever you are in the position to raise enough money, you can return it to them.
#4 Share Your Success
If your business is making more profits than you expected, would you not want your loved ones to share your victories? Instead of giving a share to venture capitalists, it is better to share your profits with those who supported you throughout the journey. It is only possible with friends and family financing. Through this, you can help many of your struggling friends or family members and provide them with an income source in return for their help.
#5 No Pressures Or Expectations
When you seek funds from venture capitalists or angel investors, you are always under pressure to work harder and reach the set level of profit. If you have taken funds from your friends and family, you can work with a free mind and achieve your goals easily. This comes out as the biggest pro of using friends and family funding.
What Are The Cons of Acquiring Funds From Friends And Family?
Just like pros, you need to be aware of the cons as well to understand the true significance of this funding approach.
#1 Putting Relationships At Stake
One of the major drawbacks in pulling money business into relationships is the risk of losing both. It is true that relationships are more valuable than money. Unfortunately, it has become a reason for chaos and arguments among friends and family. If your business is not making profits or your family member/friend is not getting the expected reward, it can lead to disputes, thereby ruining relationships.
There are many reasons why taking funds from family or friends can end up in chaos; that’s why most people avoid it.
#2 Limited Capital Availability
Unlike venture capitalists, you cannot make a financial projection with your friends and family. There will always be limited capital availability with this type of funding approach. Unless you know someone, who is in a similar niche, you cannot avail of what you ask for. Sooner or later, you have to look for other funding options. That’s why friends and family funding is not a reliable option for many. If you require huge capital, it would be better to rely on capital investors.
The Bottom Line
Your near and dear ones will always help you in the crucial time. Not only to share your happiness, friends, and family are also to share your hardships. With friends and family financing, you can kickstart your business venture and achieve a new milestone.
While it is not an authorized funding approach like venture capital and angel investment, funds from friends and family can be easily utilized as capital.
The above-mentioned were a few pros and cons of friends and family financing that you need to know about to choose whether it is worth it or not.