So far, we’ve talked about three way of funding your small business: debt financing, credit cards, and bootstrapping. Today we’ll review a fourth option – friends and family.

#4 Friends & Family

“Hey Dad, you got ten dollars you can loan me?”

When attempting to finance your business, the thought of funding with a loan from friends or family members may cross your mind. If it does, take a minute to think it through. What happens if the business fails and you can’t pay back the loan? What happens if the business finds the sweet spot and becomes wildly successful? Will your “banker” expect a percentage of the gain in addition to repayment of the principle and interest? Think for a moment about your next family Christmas get-together. Santa—or Grandpa—just might bring a hefty load of coal.

You need to recognize the serious nature of these kinds of commitments. Be careful and thoughtful in accepting funding from family and friends, who are sometimes as willing to provide it as you are to receive it (with neither side thinking it through carefully). In any partnership or business relationship, you should ensure that everything is clearly understood and delineated in writing.

I have never had the luxury or curse of borrowing from family and friends, but multiple business associates of mine have utilized this form of financing. Through marriage, I have some relatives who are extremely well-off. They created one of the largest construction companies in the western United States, a cash cow for the whole family. Each member of their extended family has the opportunity to leverage off of this success. As a result, many have developed successful companies ranging from sand and gravel outfits to road sign businesses. If this option is available to you, consider using it. Just remember that borrowing money from your family and friends is not the same as bootstrapping. You are still accountable to an outside source: you are putting your relationship up as collateral.

-Wealthy relative can support each other.
-Friends and family are quick to your aid.
-Success and failure, if handled right, both make for fond memories.

-If you can’t repay your financier, things can get ugly – and it’s easier to avoid seeing your banker than your father.
-Even with a carefully drawn-up contract from the outset, success can be hard for a family to deal with.

We’ll finish up tomorrow with the last of the funding options I discuss: angels and snakes.