When you’re looking for funding for your business idea, the first logical step is to go to your relatives. They’re much more likely to listen to your ideas and your plans than the bank. And they’re also much more likely to offer you the funds you need, if they are financially able to do so.
Unfortunately, money and family don’t always mix well and you would be wise to consider these five essential points before asking relatives for funding:
1. The Risks for your Family
Your family likely want the best for you and will do anything they can to help you and your new business. But if they aren’t involved in business themselves or haven’t given their funding to another business before, you need to make sure they understand what they are getting in to. Whilst you may be keen to convince them to invest, remember there’s a chance that your business might fail and they may never see their investment again. Get your relatives to think seriously about this possibility and if they can still commit funds on that basis.
2. A Loan or a Share in the Business
A loan will have to be repaid over time, usually with added interest. A share entitles your family member to a portion of your company. You can buy shares back or your family member could sell their shares to someone else but usually shares are held for the lifetime of the business. With shares, your relative may expect to have a more active role in dictating how your business is run. This can be helpful if you have someone with expertise who can act as a mentor but can be less helpful if you see the involvement as an imposition.
3. Keep Things Professional
Your family have invested in your business. This may partially be because they honestly wish to support you and your new venture. However, they are surely also looking to see some kind of return on their investment. You should treat your relatives as you would any other funder of your business. Show them how their investment will allow you to move forward with your business plan. Ask for the minimum investment to begin with, prove that you can give them a return on that investment and then ask for more. Give them regular updates on progress so any concerns or worries can be dealt with as they arise.
4. An Official Agreement
It’s a good idea to have an official, written agreement in place when relatives invest money in your business. A contract that everyone involved has signed is a good reference to have. Everyone can be clear on what is expected of them. If you’re agreeing a loan, you should both sign the repayment plan. If you’re giving away a share of your business, your written agreement should contain details of how much of the business your relatives now own and what that ownership entitles them to; do they get dividends?; are they involved in business decisions? Agreeing on everything up front will help to minimise confusion and conflict further down the line.
5. The Risks for Your Relationships
Ask yourself if emotions and family ties are going to get in the way of your business. Is there a chance that your relatives may use the money they have invested as leverage over your non-business relationship? Will they put pressure on you to visit more often or do more for them? And will your relationship be able to withstand the loss of money as a result of your business failing?
When you’re excited and confident about your business idea, asking relatives for funding seems like a fantastic option – it’s a way for all of you to share in the success. But tread carefully and err on the side of caution. Unfortunately, businesses sometimes fail and, if your family have invested, they will fail with you.
As a financial and investing blogger, Alana Downer might usually be found online, sharing her tips and advice with everyone who aims at achieving financial independence. Alana is also a part of the team behind Learn to Trade, a professional educational resource for traders and investors.