With finance being much harder to obtain than in the past, friends and family can be an important source of finance for a business. Recent surveys suggest that one in ten businesses currently use close friends and family to provide finance to a business.
Due to its nature, this type of finance is likely to be less formal in arrangement. It can work well but often these arrangements are informal and based purely on trust and verbal assurances. However, any confusion about the agreement could damage personal relationships, so it is important that both parties are clear about what any investment will involve.
It is recommended that when obtaining finance from friends and family that this should be approached in a similar fashion to applying for a loan from a commercial provider, i.e. present a properly prepared business plan and other relevant financial information.
Although not a formal requirement, it is advisable to engage the services of a solicitor to draw up an agreement between the parties. Both parties should be clear regarding all aspects of the arrangement. Will the provider be granting a loan or acquiring equity? What will the terms be? What will be the rate of interest charged or rights to a dividend? What will happen if the friend or family requires the money back? What will happen in the event of the business running into difficulty?
Since there will be a personal relationship at stake, as well as a business one, in some ways it is even more important than with other forms of finance to stick to the agreed terms of the arrangement. If the borrower runs into difficulties, then it is important that communication is maintained and that the lender is made aware of any problems as soon as possible.
In addition to finance from friends and family, there are many other sources of finance to explore. From loans and commercial mortgages to cashflow finance and trade solutions, Barclays can help businesses find the right solution to support growth. Follow the link below.