Starting up: Is family funding an ‘Ask’ too far?
Dubbed ‘friends, family, and fools’ what are the pros and cons of asking your nearest and dearest for money, asks the FSB’s Dave Stallon
Aspiring smaller business owners often reach a financial crossroads before a logo’s even been commissioned, with many having the tough decision of whether to rely on family fortunes, or adopt a different game plan for their start-up cash.
Financing your new enterprise with a loan provided by a family member – as around 18% of smaller businesses do – is an appealing avenue to explore, but is it the right thing to do? The Federation of Small Businesses (FSB) offers some advice.
The pros of family funding
1. Payback terms
A family member who lends you the cash to make your business dream a reality may offer more flexible payment terms than a regular lender, giving you longer to repay and charging low or no interest (interest charged will count as income to be taxed). This could be very advantageous, with no fretting about repayments in months of poor cashflow. If this appeals, draw up a contract, to avoid later misapprehensions or disputes.
Family loans can be made swiftly, with no form-filling required. You could be up-and-running faster, particularly if your credit history leads to some lenders refusing to lend to you.
The cons of family funding
Taking a family loan means playing with someone else’s hard-earned cash. If the business fails, you may not be able to repay the money, leading to ill-feeling and a lot of guilt on your part. It could also place your family member’s financial future in jeopardy. Never force a family member into loaning you money, as that could ruin your relationship, if they felt unable to say ‘no’.
Whilst some lenders might impartially critique your business, a family member may not, leaving you to potentially make mistakes an impartial adjudicator would prevent. Alternatively, a family member with a stake in your business may wish to offer advice constantly, becoming an irritation, especially if they have no real business knowledge to impart.
Other finance options
A bank loan is usually arranged reasonably quickly, if you have a business plan, and is usually ‘unsecured’, keeping your property safe if you are unable to pay the loan off.
Check whether any government grants are available, but make sure you understand the terms and outputs expected of you.
You could potentially launch a business through crowdfunding, whilst also testing demand and the popularity of your product in the market. This is not suitable for all businesses, however.
An investor may offer cash that gives them a place on your Board. Always check what they expect their return on investment to be, research their credentials and ensure they are not crooks seeking to launder money through your business.
Whichever finance option you select, think carefully about the terms and how the funding suits your wider financial aims. Additionally, intermittent financial injections may be necessary and again you should review the choices available.
FSB members can apply to FSB Cash Advance, to gain advances that assist cashflow, or pay for items such as refurbishments, equipment and bills. Head to www.fsb.org.uk/benefits to discover more.