Pros and cons of family funding

If you've applied for a bank loan recently chances are you know how time consuming and difficult the overall process can be. Securing the resources necessary for you to get your business up and running isn't always a walk in the park and it's common for some SME owners to reach out to their friends and family for assistance.

Asking family for money can be a delicate situation so it's a good idea to first weigh up the pros and cons before asking the question.

Below we've outlined a checklist of pros and cons to help in the decision making process.

PROS

Easier approval

Winning approval from a lending institute for you loan application can be a long and difficult process. Borrowing money from family is generally a more relaxed as it's easier to convince people of your idea when you have an existing relationship with them.

No red tape

Another benefit of borrowing from family is that a loan doesn't come with the same administration restrictions or red tape of a bank loan. Therefore you can rest assured knowing your focus will be on getting the business started and not organising financial documents.

Flexible payment terms

Even if your business is immediately successful there is no guarantee that your cash flow will remain consistently healthy. Borrowing from family members means you can be more flexible with repayments and won't have to worry about increasing interest rates as a result.

CONS

Lack of documentation

Although bank loans can be time consuming to have approved, their terms and conditions of a loan are usually very well thought out and clear to all parties. One of the major issues that arise from family loans is a lack of clarity on the loan repayment terms.

Potential to ruin relationships

By investing in your business family members are also putting their money on the line. A lot of family investment will come on the back of your personal relationship not on your business model, so there is the potential of ruining relationships in the instance your business fails and you can't afford to repay the loan.

Unwanted involvement

Family members that invest in your business often misunderstand the difference between financer and joint owner. As a result it's common for those in your family that have invested money to start bombarding you with feedback for improvements.

There's no doubt that financing a startup is challenging. Bank loans can take a long time to apply for but can be quickly rejected while family financing can present your SME with further unnecessary challenges.

When trying to secure financing the most important thing is that you consider the benefits and consequences of all options and then secure a solution that works best for you based on your research.

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