Borrowing from Friends and Family

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Tap into this popular source of startup financing.

Your own resources may not be enough to give you the capital you need to start your own business. After self-financing, the second most popular source for startup money is composed of friends, relatives and business associates.
In fact, "most businesses are started with money from four or five different sources," says Mike McKeever, author of How to Write a Business Plan.
"Family and friends are great sources of financing," says Tonia Papke, president and founder of MDI Consulting. "These people know you have integrity and will grant you a loan based on the strength of your character."
It makes sense. People with whom you have close relationships know you are reliable and competent, so there should be no problem in asking for a loan, right? Keep in mind, however, that asking for financial help isn't the same as borrowing the car. While squeezing money out of family and friends may seem an easy alternative to dealing with bankers, it can actually be a much more delicate situation. Papke warns that your family members or friends may think lending you money gives them license to meddle. "And if the business fails," she says, "the issue of paying the money back can be a problem, putting the whole relationship in jeopardy."
The bottom line, says McKeever, is that "whenever you put money into a relationship that involves either friendship or love, it gets very complicated." Fortunately, there are ways to work out the details and make the business relationship advantageous for all parties involved. If you handle the situation correctly and tactfully, you may gain more than finances for your business--you may end up strengthening the personal relationship as well.