Attracting investors in the early stages of a company can be one of the hardest challenges that business owners face.
However, some founders opt to seek pre-seed funding with the help of their friends and family. A friends and family round of funding involves founders seeking financial support from their personal connections.
Four in five (83%) UK SMEs are struggling to plan beyond 2023, according to VistaPrint. However, many of these companies may be neglecting to ask their friends or families. This guide will explore the article and benefits of seeking investment from personal networks in what is commonly known as a “friends and family round.”
What Are the Benefits of Friends and Family Funding?
Trust and Support
One of the significant advantages of seeking financial support from family and friends is the existing level of trust and support. These people already know you very well, and are familiar with your reliable character. This means they might be more likely than a bank to understand that you will pay them back.
Your loved ones have a vested interest in your success, and will likely help you out a little bit, even if it’s just in terms of showing up to your business’s events or promoting it on social media. Those who are in a financial position to support you monetarily may be enthusiastic to do so.
Convenience
Raising money from family and friends can be more convenient and accessible than trying to get it from a bank or through a grant. Banks and investors often require extensive documentation and proof of concept, whereas loved ones may be more willing to lend a helping hand based on your personal relationship.
This accessibility can speed up the funding process, allowing you to focus on developing your business idea. If you are in a rush, this can be a great way to get funding quickly.
Flexible Terms
When you raise money from family and friends, you have the flexibility to negotiate and define the terms of the investment. Unlike banks and formal investors who may demand equity or high-interest rates, your loved ones may be more open to negotiating kinder terms that align with your business needs.
Friends and family are unlikely to charge interest or demand a large chunk of your business in exchange for their funding. This flexibility can help you retain control over your venture and reduce the financial burden during the early stages.
How Do I Ask Friends and Family For Business Funding?
Prepare a Business Plan
Before approaching family and friends for funding, it is essential to have a properly thought-through business plan outlining your vision, goals, and financial projections. This plan will serve as a reference point to communicate your expectations clearly and instill confidence in your potential investors.
Your business plan shows your friends and family that you are serious about your business. It also helps assure them that their money will be in safe hands, and that they will get it back.
Be One Hundred Percent Honest
When discussing your funding needs, be completely transparent about the risks and challenges your business may face. Clearly explain how their investment will be used, the potential returns, and the timeline for repayment, if applicable.
Honesty and transparency foster trust and help manage expectations from the beginning. Because these are people you love, you want to make sure they are not making risks that they cannot afford to make.
Document the Agreement
You may think that this is not necessary because these are people you know well and see every day, but this is an important step. To avoid misunderstandings or conflicts down the line, formalise the investment agreement in writing.
Specify the amount of the investment, any interest or equity involved, repayment terms, and any other relevant details. Consult with a legal professional to ensure the agreement adheres to applicable laws and protects the interests of all parties involved.
Maintain Regular Communication
Establishing clear and regular communication is crucial to maintaining a healthy relationship with your investors, even if they are your friends and family. Regular communication will help build trust and demonstrate your commitment to their investment, showing them how seriously you are taking this.
If you do not want to bring business into a social setting, you can send regular emails to them with updates. Provide regular updates on your business progress, financial performance, and any significant developments.
Are There Any Risks With Friends and Family Funding?
Yes, there can be some. Friends and family investors may have limited financial resources so they might not be able to provide the significant capital needed for substantial growth. Relying solely on friends and family funding may restrict the company’s ability to scale quickly enough.
Another downside is that friends and family will not be able to provide you with industry expertise, in most cases. They may not be able to provide the same level of strategic guidance or industry connections that formal investors can offer.