Five tips when sourcing finance from friends and family

It's not unusual for SMEs to turn to family or friends in order to fund their business especially as start-ups can find it difficult to secure formal finance.

Receiving funding for your business is exciting, as it gives you the tools you need to get your feet off the ground. However, mixing business with family and friends can often be a tricky procedure that has the potential to jeopardise relationships.

In order to maintain your friendship and close ties to your family, we've sourced five tips to consider when asking friends or family for funding.

Consider a strategy

Think about how much money you need and how you plan to get that money. For instance, could you get the total from a large number of small donations or is it more realistic to meet the total with a small number of healthy donations.

Generally speaking there will be less pressure attached to smaller donations, but sometimes it's harder to get a large number of people on board.

Discuss the investment type

Even though your friends and family want to see you succeed, that doesn't mean that they will break the bank to help you. Make it known to them from the start exactly what they will receive in return for their investment. This could be anything from a straight up loan, an equity stake or even a sponsorship opportunity.

The most important thing is that you are clear on what they will receive in return for their funding.

Have a pitch ready

Not all your friends and family will be well versed in the world of business, so your business plan - no matter how well thought out - may not serve too much purpose to them. Most meetings with friends are informal, so if you're meeting with them over a coffee simply outline your idea, the reasons you think it can work and how you plan to make it work.

For more information on how to deliver the perfect pitch, click here.

Keep all documents related to funding official

It's easy to become casual when doing business with friends or family, but it's vital you remain professional in order to maintain the original agreement. Keeping official documentation won't completely eliminate potential problems, but it will limit the chance of damaging personal relationships.

Keep them informed

One of the key benefits of receiving funding from friends and family is that they won't expect you to become an instant success. With that in mind, it's still a good idea to keep them informed on the business with monthly updates or even regular emails.

Remember that you are dealing with friends and family, so be honest in these updates. There's no point pretending to be successful to make them feel better about providing funding.

Want to read more about family SMEs? Here are four common assumptions about family businesses.

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