You opened a new business and need startup capital for marketing, supplies, and an employee or two.
Forget about Bank of America, Citibank, TD Bank, a credit union, or any traditional financial institution you would think could lend you startup capital.
Where should a new business go to get funding?
You might think ‘love money’ from friends and family is the answer.
Let me go into the Pros and save the devastating Cons for the end of this piece.
THE PROS OF ‘LOVE MONEY’
1️⃣ Friends and family won’t check your credit report
If you’re sitting at a 650 from an unfortunate past situation that hurt your finances, friends/family won’t hold it against you like a traditional bank would.
2️⃣ No paperwork to fill out
All you have to do is ask, and they just might PayPal you some funds; no docs needed.
3️⃣ No monthly payments to make
Friends and family understand that you’re just getting started and, in most cases, will not expect monthly payments plus interest.
THE CONS OF ‘LOVE MONEY’
1️⃣ You can’t get much of it; in most cases
They won’t lend you much unless your friends and family are wealthy.
You might raise a few thousand, but you may need about $50k to $200k to get your business the lift-off it needs.
My client Jeffrey (not his real name) tried to raise startup capital from his circle of friends and family.
He was able to get a few thousand but really needed about $75k for marketing, equipment, and legal.
I got Jeffrey $127k in less than 7 business days for his new contractor business through my capital accelerator program.
2️⃣ Some family and friends may feel like they own you now
Look, people are human first, your friend/family member second.
When people lend money, they have a sense of ownership of the person they lent money to.
You might not think your friends or family would act that way, but money can make people act in primitive ways.
My client Judy (not her real name) came to me for $85k in business capital to pay off family members who felt like they owned her.
She needed $22k to pay off these family members and another $65k to renovate office space in Brooklyn for her new law firm.
I was about to get Judy $97K through a collection of business credit cards.
She used cash advanced checks to pay back her family members.
3️⃣ You might end up with broken relationships.
This is the biggest reason why ‘love money’ might be the worst decision of your life.
Can you put a price on a broken relationship with your cousin that you grew with?
Is there a monetary value for losing your 3rd grade best friend because of money?
These things can happen if your business venture fails and you can’t repay the borrowed money.
When Victor (not his real name) came to me to help him raise $75k for his new tech startup, he told me a sad story.
He borrowed $15k from his best friend since the 5th grade.
They were both best men at each other’s weddings, godparents to each other’s children, and lived one block away from each other in Queens, NY.
After Victor’s tech venture failed, he could not pay back the $15k to his best friend.
I helped Victor raise the $75K, and he eventually paid his friend back, but the damage and bad feelings could not be repaired.
As I said earlier: people are human first, and your friend or family member second.
🔆A BETTER WAY TO RAISE CAPITAL 🔆
The 3 Cons I just described are why I believe that ‘love money’ is the worst business decision a startup business owner could make.
There are sources of capital for startups that don’t require proof of business income or a business plan.
If you have a 700+ credit score (or can find a co-signer with a 700+ score) – we should talk.