Invoice Bazaar Blog

Pros and cons of accepting funding from relatives or friends to start your small business

By Invoice Bazaar | December 20, 2021

Most entrepreneurs have, at one time or another, faced the dilemma of whether to ask relatives or friends for funds or not. It’s a serious issue because while such funds may be readily available, you are not only risking your business but also relationships. The rewards can be high, but failures doubly painful, with social misery, added to the agony of business loss. Many entrepreneurs launch their ventures without enough business experience or track record. This puts formal finance avenues out of reach, and if there’s a shortage of personal funds, relatives or friends may be the only means to get the needed money.

Here, it would be best to be careful about who you should approach for funds among your relatives or friends. The toughest to convince, but those who would most readily forgive would be your parents. They may also not ask for interest. However, it will be a matter of pitching, negotiating, and bargaining with most others. They differ from a formal investor only because they would not doubt your integrity or paucity of funds. But they will undoubtedly want to be convinced about the viability of your business proposition. Sometimes, a significant advantage of taking money from your relatives or friends is that they will take a keen interest in what you are doing compared to a bank or external investor, and they may even provide valuable advice and connections. 

So, to sum up, the pros are fewer hassles, more flexibility, and more support. On the other hand, the cons are they may not point out your business weaknesses to avoid hurting your feelings, and if your business fails, you may even lose some of your most invaluable relationships. Hence, you should always do the paperwork, pitching, accounting, and repayments to relatives and friends, the way you would do for external investors. Remember that there’s no middle path when relatives and friends fund your business. Either it is a win-win, or it is a lose-lose scenario! So, think before you leap.