Justification in Asking Family and Friends to Fund Your Business

Justification in Asking Family and Friends to Fund Your Business
Justification in Asking Family and Friends to Fund Your Business
October 1, 2016

Turning towards family and friends for financial aid for your business can be a monstrous act. Those that are unwilling to help may try to demoralize you by listing all the possible wrongs that can make your business to fail while there will be a strain in your relationship with those who decide to help. Yet, many entrepreneurs will quickly run to family and friends when they need financial aid. How right is this?

Sixty three percent of entrepreneurs self-financed their business

Recently, the National Knowledge Commission released a study report that showed that 63 percent of entrepreneurs self-financed their business. A closer look at the study further revealed that at least half of that number asked family and friends for help and did not necessarily have to save up the entire needed fund. It is thus advisable that you should make your fund ready before you start your business.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

Family and friends can disappoint you at the last minute

Often, family and friends will quickly say yes to your cash demand up until the time to write check comes says a business consultant, Tom Scarda. Irrespective of the close nit relationship, when you are seeking for financial help from your family and friends, you have to really convince them about the potentials of your business rather than expecting them to understand. The best way to convince your family and friends is as follows:

1. Make your business plan outstanding

Whether you are approaching your parents or your best friend, treat the discussion like a professional and wear the banker’s look. Not even a bank will give you loan without a good business plan so do not expect others to. A quick glance at your business plan should reveal your goals and how you plan to make profit which is what every investor will be keen to see.

2. Do not be tempted to ask for too little

You may want to play the nice guy when you approach a family member or a friend for financial help by asking for an amount that is far less than what you really need. This is disastrous. If the money you have cannot efficiently kick off your business, it is bound to fail and send a signal to your financier that you are not good with managing money which will make it more difficult for you to get further help. When asking for money, add up the following;

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

  • Initial investment: money you need to get the business ready
  • Working capital: money needed for daily running of the business
  • Home capital: money you need for your bills (survival ration) till your business begins to generate profit.

3. Have a repayment plan

Generally, people will be more willing to render financial help if they are confident that you will repay your debt (It is a little wonder that banks request for collateral as a guarantee). Same applies when asking family and friends for financial assistance. Show them you have plans to payback starting from six months’ time at most.

4. Give them an active role in the business

When family and friends contribute to your business, they will want to be in the know of how the business is done (obviously to safeguard their money). Make sure you discuss how much stake the investor will have before taking up any money from them. Expect that they can come up and ask you random questions from time to time. This should not piss you off; rather, get all the necessary documents handy so that you can always answer their questions convincingly.

Read also: What You Never Knew about the Small Business Administration Loans

Article highlights

  • Family and friends are rare source of funding for startups.
  • When family and friends fund your business, keep them in the know of your progress.
  • Family members who do not wish to help may try to demoralize you.
  • Make plans to payback whatever you have borrowed.
  • Family and friends may not ask for interest.
  • Never ask for funds from family and friends under any rigid condition.
  • Borrowing from family and friends may put a strain in the relationship.
  • 63% of the entrepreneurs self-financed their businesses.
  • To be hopeful for funds from family and friends is more likely to end in disappointment.
  • Have a good business plan before approaching family and friends for fund.

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