Loans from family and friends are a common form of financing for start-ups and one of the most accessible methods for small enterprises. This type of financing is also the most commonly used funding method by early stage companies that need to boost performance or enhance balance sheets prior to obtaining more formal secondary money.
If you decide to pursue this route, you should consider at the loan as a business investment. You should treat your family or friends as you would treat a bank or traditional lender.
Issues to Consider
Loan agreements should be in writing.
Do not borrow more than the lender can afford to lose. Borrowing from your aunt's retirement account, for example, may not be the best family or business practice.
Family and friends may not ask for full disclosure. Provide it anyway. You want them to fully understand their investment prior to turning over any funds.
Determine how involved the family lender will be.
Understand the possible consequences—emotional and financial.
Compare:
Advantages
Can be arranged quickly.
Friends and relatives invest because they know and trust you.
There is no application or processing fee.
Disadvantages
If your company does not succeed, your relationship can be adversely affected.
