Advantages and Disadvantages of Borrowing Start-Up Capital from Friends and Family

Posted: October 1, 2014

Many people hoping to start a franchise operation will face the dilemma of where to obtain needed start-up capital. There are many different options for obtaining funding, from traditional lending institutions like banks and credit unions, to angel investors, to crowd lending websites that have become increasingly popular in recent years.

Another option is asking friends and family for help. There are advantages and disadvantages to borrowing from friends and family, however. While it may be tempting to go straight to family members for a loan, they really should be last resort. Below we discuss the pros and cons of borrowing from family or friends.

Advantages

No or low interest — While close family and friends may ask for some interest on the loan, often they will ask for none at all, and it is generally unlikely that they will charge high interest.

An already-established relationship –– Your family and friends know you well and are more likely to have faith in both your idea and your overall character.

Disadvantages

Disagreements about who’s in charge –– You may find your family member or friend giving unwanted and unsolicited advice about how to run your business. Keep in mind that if the loan is treated as equity, then the person who lent you the money technically does have a say in your business. It’s important to establish up front whether the loan will be treated as equity.

Jeopardizing personal relationships –– Nothing can turn a relationship sour more quickly than a business deal gone bad. It’s important to consider that borrowing from a friend or family member carries the inherent risk of potentially straining the relationship in the future.

Carefully weigh the pros and cons of borrowing from friends or family, and make this your last resort. Most people would agree that involving a friend or family member in your non-medical home care business investment is not worth jeopardizing your personal relationship.

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