Fire your Accountant & Hire a Partner

What you need when raising money from friends and family

Posted on 15 June 2010

Jessica Routier

Brother Can You Spare A Dime

Businesses need money to start and run, and rarely do businesses make enough money right out of the gate to fund their own operation and growth. Frequently, you need to get money from somewhere else.

In the OPEN Forum article “Finding Money for a Start-up“, Tom Harnish outlines the common ways for businesses to get money (read the article here). He rightly points out that a lot of businesses see venture capitalists as the primary way to get free money but they really aren’t. In short, Harnish suggests that you don’t even bother.

Banks, personal funding, and the friends-and-family model are the most common ways to get the money you need. Banks are more difficult to get money from if you’re just starting out, partly because they prefer collateral and a good track record. Personal funding is not bad but can create messy accounting and you can quickly lose your cushion… which means that if things go bad in your business, they’ll end up being bad for you.

The friends-and-family approach works, even though there are risks. On the plus side, you can spread some of the financial risk around to others, collecting (for example) $500 from 20 of your closest friends so you have a $10,000 investment to move forward. That’s not a lot of money and, if people believe in you, they may be willing to put it up for interest.

The financial risks may not be there but the relationship risks are! You can quickly lose friends if you don’t pay back right away or if they feel that they now have the right to give you advice in your business.

The way to solve this is with:

1. Clear business plans. Even though these are family and friends, you should still show them your business plan and how you intend to use their investment to make money. A close personal relationship should not replace your business pitch.

2. Clear agreements that outline exactly what they get back. Show them what they can expect and how they can make money and you plan to get that money to them. Tell them what you’ll do if you don’t earn the money you were hoping to pay them back with.

3. Clear descriptions of what they can and cannot do. Show them that they can ask you how things are going and commit to giving them a report each month on your progress. But, point out that you are under no obligation to act on any business advice they’ll generously give.

This plan won’t solve all of the challenges you may face when you have your family and friends invest money in your business but it can certainly help keep things saner.

Jessica Routier, IAC-EZ

IAC-EZ provides online bookkeeping for entrepreneurs, coaches, freelancers, and small business owners who want to work less on their finances and spend more time on their business.  Visit their blog, http://blog.iacez.com, for tips, tricks, and techniques to run your business more successfully, or head on over to http://www.iacez.com to sign up for a 14-day free trial.