Articles in the Series:
- Pros and Cons of Using Own Money
- Pros and Cons of Credit Cards
- Pros and Cons of Borrowing from Family and Friends
- Pros and Cons of Bank Loans
- Pros and Cons of SBA Loans
- Pros and Cons of Angel Investors
- Pros and Cons of Venture Capital
- Pros and Cons of Crowdfunding
- Pros and Cons of Business Plan Competitions
- Pros and Cons of Supplier Credit
Pros and Cons of Borrowing from Family and Friends
Family and friends are often the first sources of funds for a small business owner. They are accessible sources of capital. Learn the pros and cons of borrowing from family and friends:
Advantages of Borrowing from Family and Friends
- They are interested in seeing you succeed because they know you and trust you.
- Easier source of startup capital with fewer paper works (sometimes, a handshake is enough) compared to bank loans
- Viable source of capital especially for those who have bad credit, have no collateral, no equity investment to put into the business, or no track record in running a business.
- Lower interest rates compared to commercial lenders, with no loan fees
- It is possible to negotiate a flexible repayment terms compared to a commercial lender. You may even be able to withhold repayment until after six-months or a year of starting the business allowing you to build cash flow.
Disadvantages of Borrowing from Family and Friends
- Relationships can be ruined if you are late in your payments or you are unable to repay the loans
- Your family and friends can have unclear expectations especially if the process of getting the loan was done so informally. They may not know when they are going to get paid, how they will get paid, if they can charge any interest, or even if they are entitled to the products and services that you will produce.
- They may feel that they can interfere, make business decisions and call the shots even if they don’t understand the business. After all, the funds you are using to operate the business came from them.
- If there are family issues and squabbles, it can be awkward considering you have outstanding loans with some of your family members.
- If there is a falling out or disputes, you need to have a plan on how you can repay the loan as soon as possible.
For more information, read How to Borrow Start-up Capital from Family and Friends
- How to Find an Angel Investor for Your Business
- How to Start a Business with Bad Credit
- How Angel Investors Can Benefit a Small Business
- 5 Strategies to Raise Capital for a Small Business
- 12 Tips for Getting Your Bank Loan Approved