Is It Wise To Use Your Family And Friends As Investors?

Family And Friends As Investors

Most small businesses need to raise capital in order to be able to grow. The start-up phase is always very delicate. There are many expenses you need to make, but you don’t have enough paying customers to cover such amounts. Under these circumstances, you have to finance your business from your own pocket for a while. What if your pockets are empty? Are you doomed to fail just because you can’t pay for the necessary tools for growing a business?

Some people think to take a loan from a bank or to max out their credit card. However, such solutions can be very dangerous, as they set you on a downward spiral which is very hard to break. Loans come together with commissions and significant interest rates. Credit card money is even more expensive. Short term loans can easily kill you if you can’t repay them quickly.

If you haven’t considered this yet, you should learn that your family and friends are an excellent funding resource for your start-up, so you should definitely try to bring them on board. It may be easier to persuade people who know and love you about the potential of your idea rather than attracting a bunch of stranger give you credit. Friends and family already trust you, so they are going to be more willing to invest in your business than people who haven’t met you before.

Even though your beloved ones trust you, this doesn’t mean they are going to give you their money for free. You need to show them a solid business plan and to give them some benefits in exchange for their investment. They are going to be more open to invest if you can prove they are going to make a nice profit out of it.

The dark side of attracting family and friends into becoming your investors is that raising money from them creates emotional issues that may interfere with the business judgment. Just imagine what would happen if your business failed. You wouldn’t be able to give these people back their money, but you are still going to sit next to them at the Thanksgiving dinner. This can be awkward, so you may want to avoid such situations by trying to find investors outside your circle of relatives and close friends. Even if they forgive you for losing their money, you are still going to have the feeling of guilt. Nonetheless, if you believe you are able to live with this, you can go ahead and explain your relatives the advantages of investing into your brilliant idea. Moreover, if your business proves to be a success, they are going to see a very nice return on their investment. In this situation, you are going to become the hero of the family, as everyone is going to love and appreciate you even more. Just think about all these pros and cons very well before picking up the phone to call your family.