For many business owners wanting to start or grow a business, family and friends are the first port of call for funding. They are usually less demanding than banks, easier to access and more likely to support your ‘great’ business ideas.
But there is a down-side. Start-up businesses are generally high risk and may take a long time to generate returns. Growth and expansion plans may be far less profitable than anticipated and can hit bumpy ground. So if things go wrong, how do you avoid damaging your relationships with those closest to you?
Before borrowing money you should first conduct research, identify a clear business opportunity and prepare a business plan which clearly outlines what you propose to do and how you will do it. Your plan should also include financials and your projected income and expenditure.
Loan, investment or gift?
Clarify whether your family and friends are providing a loan, an investment or a gift. This is vital as other people may be affected by their decision and it has the potential to cause serious misunderstandings later on. It may also impact on your own financials and how you run your business.
Loan – you will need to agree on a repayment schedule, interest rates, time frame, penalties, reporting procedure etc.
Investment – in addition to a repayment schedule etc. you will need to clarify whether the investor has any say in the running of the business, shares, stock options, board position, or has other responsibilities or liabilities.
Gift – check with ATO re the tax implications.
Key tips:
- Keep the relationship professional and ‘pitch’ to your family and friends as you would to any other investor.
- Show them your business plans and explain how your business will work; how much you need, why, how and when their money will be spent
- Outline both the best and worst case scenarios and time frames for actions
- Be very clear that they can’t easily withdraw their money once invested if they have second thoughts; require it for other purposes or if you have a disagreement.
- Clearly outline how and when you will repay them and the amount, interest, stock or other options that may apply, the term, end date, penalties for late or non payment, termination clauses, and flag any other liabilities or issues that may arise
- Outline what will happen if the business is dissolved, sold, merges or if a dispute arises.
A sensible way to ensure that all parties know exactly what is happening is by putting your agreement, the financial arrangements and all the relevant conditions in writing. Your accountant or lawyer can help you with this.
Need help looking for grants or other sources of funding? Call INNOVIC on (03) 8060 3504 or www.innovic.com.au. We are commercialisation specialists.
