- Flexible Terms: Unlike other forms of traditional finance, funding from family and friends is typically offered on flexible terms. Friends and family may agree to a longer repayment period and may seek a lower rate of return than traditional lenders. On a practical level, little or no security is required and the repayment can be tailored to your financial projections.
- Minimal charges: One of the greatest advantages of borrowing money from friends and family is that the funds are offered at little or no interest. As a start-up or loss-making company, the interest rate charged by traditional lenders can be very high.
- Easy to set-up: On a personal level, the family member or friend already knows your ethos and business circumstance and so are less likely to demand a detailed business plan.
- Family feuds and friendship squabbles: One potential downside of borrowing from friends and family is that slow or non-payment can fracture relationships on a personal level. Losing the friendship and support of loved ones should mean much more to you than the initial sum borrowed in the first place.
- Who’s in control? There is a real risk when borrowing from family members; the individuals may feel that they are now part-owners of the company, with a right to make business decisions. You can avoid this by stating in the loan terms that you will be in charge of the day-to-day operations of the business.
- Less stability: Family and friends can sometimes demand quicker repayment prior to the arranged terms (due to personal financial issues), whereas bank and other independent lenders have more stability.