Why You Should Never Ask Your Friends And Family For Money

man-asking-for-money

Continuation from yesterday…..(How To Raise Money From Your Friends & Family)

In the industry, family money is oftentimes called “Dumb Money”. It is dumb because the people who are making any said investment decisions are making them based on various emotional factors as opposed to an in depth analysis of your business idea and/or your business deal.

And in most of the cases the conversation goes something like this. “Hi…. Mom, Dad, Uncle Bob or my best mate Jimmy, I have this wonderful business idea that will make me filthy rich, but I need money to make it happen. Can you give me $10,000 for 5% of my brand new company? When it succeeds over the next 6 months I will be worth billions and you will be worth millions. How about it?” Believe it or not, but in most cases this type of a conversation is good enough to start your capital raising process.

What’s more, everyone has a different type of a relationship with their friends and family. Whatever that situation is for you, these folks are still the easiest group to raise money from. Remember, they trust you and they trust your judgment. In fact, chances are, most of them would like to see you succeed. If they like your idea and have extra money the probability of you getting that money is fairly high.

Now, and this is very important.

Just because it will be easy for you to raise money from this group doesn’t mean that you should nor does it mean that you should take advantage of their trust. It is highly recommended that you approach your family and friends in a professional businesslike manner. Just as you would any other investor. That means your “ASK” and the rest of the documentation should be ready to go. Finally, you must keep the following points in mind when trying to raise money from your friends and family.

You are likely to lose this money. The failure rate at this stage of the game is very high. If losing your friends or relatives money will have a severely negative impact on your relationship with them, it is better that you reconsider. Better yet, decide what is more valuable. Your relationships with them or the money. If it is your relationships, DO NOT ask them for money.

Only raise money if you are 100% confident in your business idea or product. If you are not entirely confident, keep working on it until you are. Never raise money from this group if you are going on a hunch. It is almost certain that you will regret it later on.

Only ask those who can afford to lose it. Do not ask your 95 year old aunt Judy for a $5,000 investment into your HotGirWithSmellyArpits.com business idea if she relies on her social security for income and sometimes has to choose between her medication and a good meal. For god’s sake, have some consciousness.

Anticipate paying back the money. Before you ask your friends or relatives for money, clearly understand that you will have to pay this money back one way or another. Even if you lose it. It is the only way you will be able to keep your relationship with them intact. That might mean working double shifts until all of your loan or investment accounts are settled (if your business fails).

Approach you capital raising process in a legally correct format. Whether you are structuring an equity infusion or debt financing by your relatives, have all legal document properly structured and signed. Yet, do not go crazy here. A one or a two page simple contract will do at this stage. Plus, you do not need an attorney to get this done as there are a lot of resources online.

This process can be easily done though sites like LegalZoom.com or by writing your own contract. Remember, it doesn’t have to be complicated. Just an outline and what they should expect out of the deal. Should anything go wrong, it will protect both them and you from any unintentional developments.

That about covers raising money from your friends and family. The next best option you have is borrowing that money from various sources.

To Be Continued Tomorrow…..(Why Am I Seeing This On A Financial Website?)