What Sort of Funding is Right for you?

Yesterday Philip together with Dale Williams (founder and MD of Yolk Recruitment) and a representative from Nat West's Debt Team took part in the panel section of "Investment: Busting the myths" at the Entrepreneurial Spark Hub in One Capital Square. 

There were numerous questions from the floor. One of them (paraphrased) was.

"If I needed 40k to take my business to the next stage and I had a Friend/Family willing to provide it should I take the money and should it be equity or a loan?"

This led to a discussion about bank funding, the probability of personal guarantees being required and the possibility of "losing your house" if the business failed. Could you take that risk? If the answer is "No" what does that tell you? 

From a business point of view the categories of finance (and desirability) probably are in this order:

1.   Free Money (Grants, family loans)
2.  Low cost / Low consequence money (low interest rates, no Personal Guarantees required  etc.)
3= High Cost / High Risk Money
3= Equity

Dale made a very important point in considering taking money from 'Friends & Family':

"Don't underestimate the value of the money to the person who offers it"

Borrowing Money from Friends and Family for your business is a huge decision and one not to be taken lightly. Win or Lose - Money changes relationships.

Some things that you need to consider:

  • Can they afford to lose the money? If the money is lost what will that do to my relationship with them?
  • If I take the money as a loan and the business comes good will they be proud of helping my success or resentful that they don't own a slice of it?
  • If I take the money as equity, how much of my baby should I give them? If their share becomes valuable will they have the same appetite as me for risk and will they block/resist plans that might put the business at risk for greater gains in phase 2, 3, 4 or 5 of it's growth?

Take some time to work out what it is that you want, what are the range outcomes for you and them and, once you have decided on 'plan A',  thoroughly discuss that range of outcomes with them before you accept the money. Often, despite the interest rates and the other requirements of banks, taking money from unrelated parties is a cleaner option. 

If you do accept the money from friends and family then make sure that you, at the very least, have a written agreement on the amount and terms that everyone involved agrees with, signs and has a copy of. You don't necessarily need a lawyer for this but the document does have to be un-ambiguous.