Choose the right finance when starting up

If you can't raise enough money to start your new business yourself, friends and family may be willing to help.

They might loan money to you, your new business, or they might invest in your business, e.g. by buying shares.

You should provide potential investors with an up-to-date business plan.

It will help demonstrate how their money will be used and explains the long-term plans for the business.

You should also make sure that you have a written agreement in place that sets out terms and conditions, including any interest and repayment terms. This should help avoid misunderstandings.

There may also be tax implications for you and your family, especially on interest-bearing loans.

Advantages

• Friends or family may be more willing to lend you money than a bank, particularly if you cannot provide security for a loan.
• Friends and family may offer easy terms - eg an interest-free loan.
• If you can raise some finance from your own resources or friends and family, it should make it easier to get additional finance from the bank.

Disadvantages

You need to be careful.

You may feel under personal pressure, particularly if your business starts to struggle and there's a risk that friends or family will lose their money.

Remember that they may worry about their money too, and this may put a significant strain on your relationship.

As a rule of thumb, you should never ask them to lend you more than they can afford to lose.

You should also seriously reconsider whether your business is a viable prospect if traditional lenders such as banks are unwilling to lend you money to start up.

It is wise for both sides to take professional advice before proceeding with any agreement. You should consult your financial adviser or solicitor.