ONE FUNDING SOURCE – Family & Friends
Working capital has always been an issue for many small business owners. For those businesses that are looking for an infusion of capital under $100,000 consider asking family and friends. In the past this has been the major source of funds for new businesses. ( I read an article which stated that in 2011 friends and family invested a total of $50 billion, far more in total money invested than venture capital and angel investors combined)
Like any loan, there are several things that have to happen:
- Have a written plan and a budget explaining what the funds will be used for and how they will help the business. Explain the potential financial gain to the business.
- Don’t just ask for funds without a carefully thought out presentation on your business. Be prepared as if you were asking for a million dollars from a stranger.
- Like any business venture there are risks associated with a venture. Explain the risk involved and the potential of a loss.
- If the family or friend that you are targeting for the “ask” would suffer a great financial hardship should your venture fail, don’t ask or take the funds. A rule of thumb: no family member or friend should invest more that 5% of their net worth.
- Present a payback plan; don’t forget to include an interest rate.
Obtaining funds in this fashion has pros and cons. On the positive side, the funds are usually easier to get and they come in faster. You already have a position of trust because you are known to this group. I also find that you can get better terms from family and friends than from most other sources.
The cons include the possibility of losing this money and thus breaking a relationship. The amounts that are given are much smaller requiring, more people to invest, in order to reach your goal.
If you truly believe in your business, and you should if you own it, then for loans under $100,000 this may be the best way to proceed. In my experience many businesses can get over the initial new business or expansion financial needs by using this method to obtain their funds and then can self-fund their own growth.
Yes, there are cases where the business potential may show a need for much larger amounts of capital and yes, we will address that in the near future.
Always ask The Duck if you need more information.
Success is doing ordinary things, extraordinarily well!
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