Askin friends and family to invest in Your business is a BAD idea

[Hurbel2k]

Sometimes I hear that people when they have a business idea, they ask friends and family for capital. I say this is a bad idea.

The reasons are simple. No business plan is bullet proof. And to be exact, before You start Your business, this plan is untested. You don't know if it works.

If You ask friends and relatives for money, they are more likely to give it to You, because You are respected amongst them. However You put them at risk of loosing their money and each others respect.

A bank or an investment capitalist will review Your proposed ideas in a much more strict way. Your friends often don't have the experience to review Your stuff. Maybe they even come from a total different field. Common flaws that a professional can show You in 5 minutes can be overseen by a layman.

Therefore, get Your money from a professional. It's for Your own advantage.

[devilbatista]

No offense though but I don't agree with you Hurbel2k. I have seen successful person who are doing successful business and they do have taken loan from their friends or family or relatives. Here, in my community it's so. Family help their relatives.


The reasons are simple. No business plan is bullet proof. And to be exact, before You start Your business, this plan is untested. You don't know if it works.

There are some cases that you may lose your business when you take loan or capital from your friends or family. But it's your fault because you didn't plan well in your business. Therefore you yourself are responsible for losing the money.


Therefore, get Your money from a professional. It's for Your own advantage.
Some friends and family members can also be professional.

[Fergal]

I think Hurbel's point is a good one, in that it is a warning of the risks of borrowing from friends and family. Borrowing money from friends, is an easy way to lose friends, so you need to be very careful.

I agree that you do need caution, but I still feel that there are times when it can be very beneficial.

There are some points you should consider before you borrow from friends and family. I refer to points that are specific to friends and family, there are obviously lots of other things that you need to consider regardless of who you are borrowing from.

Can the person lending you the money afford to lend it? This probably wouldn't concern you if you were borrowing from a bank, but you don't want to put friends or family under financial strain.
Make it clear to the lender that this is a business loan and that there is always a possibility that the money could be lost.
Sign a written agreement between the two of you. Hopefully you will never need it, but if there is a dispute it will be useful to refer back to.
Try to borrow from someone with business experience and knowledge so that they can also give you useful advice.

[Swastik]

In my personal view, Hurbel had made a very important point. Taking loans from relatives or friends can prove to be fatal for relationships. If you have a friend/ relative who has some idea of maintaining a successful business, you may ask him to review your idea (without the risk of being stolen).

Otherwise, it's always better to get help from Banks or other media which strictly review your application and don't help you based on emotions but on your idea's actual merit.

But, as Fergal said, it could be beneficial too provided that you have all terms and conditions clear in black and white before you start working with each other. That's the way a professional would work.

[Nazreen]

Most of the times, our friends are in the same social standing as us. They're also almost the same age as us and with the same likes and dislikes. Sometimes, our family also has the same likes and dislikes. The basic rule of leverage, in this case financial leverage, is that you must look for people who have what you don't have. In this scenario, we don't have money so we must look elsewhere for that.

If your family or friends have money, it should be okay to borrow from them but treat it as if you're borrowing from a financial institution like a bank. You must draw up some IOUs to make things legal and binding. Sad to say that most of the time, people tend to neglect the debts they owe their families and friends and concentrate on paying the banks first. This should not be the case because money is still money, whether you owe it from a bank or from a family or friend.

[Fergal]

... Sad to say that most of the time, people tend to neglect the debts they owe their families and friends and concentrate on paying the banks first...

That's actually a very good point. The lender may feel that they are protected because of the friendship and that they will get paid first, when in fact the opposite is likely to be true and the friend will get paid last.

[DEADMAN]

Hurbel2k Yes, I agree with you in some partial.


The reasons are simple. No business plan is bullet proof. And to be exact, before You start Your business, this plan is untested. You don't know if it works.

You made a good point here and personally I liked this point. But let me remind everyone sometime it differs from person to person. Some creative people who are creatively rich but financially poor sometimes their ideas are of great value but with low finance they cannot overcome their ideas to be implemented.

I've already posted in a thread by, that a Simple idea has make you Millionaire so depends on the creativeness of the people, and exactly differs from people to people.
But Hurbel2k you're not wrong thou, they're 100% always working and don't know if they exactly work.

[Nazreen]

When you go to a bank to borrow money for a business, the bank officer will usually ask you a lot of questions including, "what are you going to do with that money?", "what fixed assets like properties do you own that can be used as collateral?, etc. The thing is that you need to convince the bank officer that you can actually pay off your debts when you're setting up a business. Banks, however, require collateral to act as a security to your loan.

When you borrow from a friend or relative, you should also do the same. You need to explain to him about the business you're about to undertake. And of course, there's no business endeavor that is 100% risk free so you also need to mention this along with the steps that you will undertake to minimize these risks. So that your friend or relative can have peace of mind, why not ask him/her to be a business partner instead? In this way, he will also be working to make the business successful.

[deepak_sharma]

Well in my opinion the lesser you have limited liabilities the better it is.In case of unlimited liabilities their is a high risk of bankrupcy in which not only you but your family would also suffer...