Gabriel Eze had always wanted to be an entrepreneur but his forays into several ventures had not been successful. One day, he had a conversation with Abigail Edwards, an employee of Pace Enterprises, a major manufacturing company in the United Kingdom. Pace Enterprises had been looking to enter into the Nigerian market and, as such, they were seeking a reliable distributor of their products. Having been disappointed by several potential agents, Abigail was initially skeptical but she was eventually won over by Gabriel’s sincerity, humility and evident passion for their products. She decided to take the risk of allowing Gabriel to be their sole distributor in Nigeria.
Gabriel was overjoyed by the opportunity but soon ran into an obstacle. In order to take up the franchise, he needed strong financial capacity because the business was capital intensive. He had a wealth of knowledge, experience and network but no funds to back up his new venture. He decided to raise the required capital by selling equity in his company to his family and friends.
After making this decision, he contacted Seun Odudu, a friend of his who was a banker. He explained the business to him; its opportunities and future prospects. He then invited him to purchase the shares of the company as a shareholder. Seun believed in the business but refused to commit until he had done his due diligence. He proceeded to travel to the United Kingdom to verify the existence of Pace Enterprises. After this confirmation, he bought a stake of 30% in the company, thus providing the much-needed capital infusion for Gabriel’s distributorship. Today, the fledgling idea has grown in leaps and bounds, turning in annual revenue in excess of a billion naira.
Access to finance remains one of the key challenges of aspiring business owners. To close this gap, friends and family remains one of the more viable means of securing initial funding for a new business. However, there’s a right way and a wrong way to go about this. Here are a few rules of thumb to remember when asking friends and family members for money:
Be professional at all times: The request should be presented in a businesslike manner, just like one would deal with a banker or investor. The potential of the business along with the risks involved should be carefully and fully described.
Prepare the required documentation: If the help the entrepreneur receives is in the form of a loan, a promissory note should be prepared, with a repayment schedule, and the note should be signed by both parties. Stipulating the terms of the loan in writing reduces the potential of a misunderstanding and protects both the entrepreneur and the friend or family member providing the funding.
Approach the right people: Financial help should be requested only from those who are in a legitimate position to offer assistance. It’s not a good idea to ask certain friends or family members, regardless of how much they may have expressed a willingness to help, for assistance if losing the money would cripple them financially.
Friends and family are viable sources of funds for many new ventures. According to Fundable data, 38 percent of start-ups are funded by friends and family, with an average investment of $23,000. This type of contribution often comes in the form of loans or investments, but can also involve outright gifts, foregone or delayed compensation (if a friend or family member works for the new venture), or reduced or free rent.
However, care needs to be applied when utilizing this source of funding, as entrepreneurs who are unable to repay a loan to a friend or family member risk not only damaging their business relationship with them, but their personal relationship as well.