For the aspiring entrepreneur, one of the hardest questions that must be tackled is finding a source of capital. The previous posts have covered methods such as crowd-funding and bank loans. There is however, one obvious option that has not been covered: asking friends and family members for financing.
The first and most important aspect of asking friends and family members is to realize that it’s unreasonable to expect them to finance your business as a “gift”. Cliff Ennico, author of the Small Business Survival Guide, notes that, “People either loan you money-which you must pay back with interest over a specified time period-or they make an equity investment in your business-buying the right to receive a percentage of your future profits.”
Even with guide for entrepreneurs provided by Entrepreneur Magazine notes that, ” Many experts suggest loans as the optimal way for friends and family to invest because there are set repayment terms. They will know how long it will take for them to get their money back and at what interest.”
Between the options of loans and equity, it’s important to consider what is the optimal choice. The aspiring entrepreneur that receives a loan from a family member or friend may find themselves in a difficult position if their venture doesn’t pan out, and they’re forced to pay back the loan with any interest stipulated in the agreed contract.
While equity may seem like the more favorable option as there’s no pressure to produce an immediate profit or pay back a loan, there are other consequences to be aware of. The Entrepreneur Magazine guide notes that if a friend or family member provides equity to an entrepreneur’s venture, “He or she will have a right to tell you how to run the venture. This can be highly beneficial if your acquaintance/investor has entrepreneurial experience or other useful know-how. But it can quickly become an annoyance otherwise.”
The most obvious consequence that comes with receiving funding from family members and friends however, is the risk of damaging those relationships. Mixing business practices and finances with those that the entrepreneur is close to may result in hurt feelings if the venture isn’t successful.
Why risk damaging those personal relationships? Overnite Capital provides a reliable, quick cash flow. Unlike traditional bank lines of credit, that focus on a credit score, factoring focuses on receivables from customers and their ability to pay. And unlike receiving finances from friends or family members, Overnite Capital will provide the financing and experience without the risk of hurt feelings. For more information, please call us today or message us via the Contact Us tab.