Finance Your Business Yourself or By Family and Friends

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TeamPlayer

Yellow Belt
It's usually expected by a bank or other investor that you'll be putting up some of the money yourself. That way the risk is partly yours, and that gives lenders more confidence in your efforts.

Obviously if you have your own savings that's the simplest solution. Other ways to raise money-

* getting a mortgage, or second mortgage.
* borrowing privately (friends and family for example).
* getting an unsecured loan, or borrowing on credit cards.
* selling possessions.

You should think very carefully about borrowing. Interest rates can be crippling on credit cards, and they are really only for very short term borrowing. If you loan far more than you really need you will be paying more than you have to in interest, and the repayments could be so high you have little left for running your business.

Advantages of using your own money via unsecured loans-

It allows you more control than other finance options. Outside investors or lenders want a good return on their investment in the form of interest, shares or dividends.

Disadvantages

If your business fails you could lose your home and other personal possessions.

Use finance from friends and family

If you can't raise enough money to start your new business yourself, friends and family may be willing to help. They might lend money to you or to your new business. Depending on the type and size of business they could even become shareholders. Family will often, though, just want their money back at some time, without wanting interest in return.

Avoid misunderstandings by always having any agreement in writing, setting out terms and conditions, including any interest and repayment terms. Don't think that because it's family or friends this step won't be necesary. Memory fails, and what you think you agreed to isn't necessarily what the other party remembers some way down the line.

Advantages of borrowing from friends or family



* they may be more willing to lend you money than a bank, particularly if you cannot provide security for a loan.
* friends and family may offer easy terms an interest-free loan, or be more flexible.
* if you can raise some finance from your own resources or friends and family, it should make it easier to get additional finance from the bank.

Disadvantages

You may feel under personal pressure, particularly if your business hits financial difficulties, and there's a risk that friends or family will lose their money, or you can't make repayments on schedule. They may worry about their money and this may put some strain on your relationship.

Be honest with yourself, if banks aren't willing to lend you the money is your business a viable proposition? As with all types of investments, the maxim is 'Don't invest what you can't afford to lose' which is certainly applicable to borrowing from friends and family. You should only ask them to loan you what they could, if the worst happens, afford to lose.
 
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