The Pros and Cons of Friends and Family Financing by Rieva Lesonsky

The types of business success stories that make news typically involve hot young startup entrepreneurs landing millions of dollars in venture capital. That’s why it may come as a surprise to you to learn that the average startup entrepreneur finances his or her business using personal savings or money from friends and family members.

What are the pros and cons of financing from friends and family?

Here are some pluses and minuses to consider.

Pros of friends and family financing:

• They trust you. No one believes in you like your friends and family do. Assuming you have a good relationship with your family members, they’re naturally inclined to lend you money—after all, you’re family!
• They care about your success. Friends and family members are motivated to help you financially because they want to see you succeed, unlike outside lenders and investors who are motivated solely by their own financial gain.

Cons of friends and family financing:

• Friends and family may feel like they can’t say no when you ask them to invest in your business. Because they don’t want to cause hard feelings, they may be reluctant to point out weaknesses in your business model.
• If your business doesn’t return a profit for friends and family investors, or you’re not able to pay back the loan a friend or family member has extended, you could lose more than money—you could lose a valuable relationship.

Don’t let the risks of friends and family financing scare you away. By treating money from friends and family properly, you can have the best of both worlds—the capital you need and the relationships you value. Here are three steps to take:

1. Pitch the opportunity professionally. It’s OK to broach the subject informally with friends and family to see if they’re interested, but if they are, you need to make a formal presentation, just as you would with any lender or investor. Prepare a detailed business plan that explains your business model, your marketing plan, your financial projections and what the loan or investment will be used for.
2. Don’t do a hard sell. It’s easy to feel pressured when a family member needs money. After you make your presentation, give friends and family members plenty of time to go away and consider their options. Don’t push, and above all, never take money from anyone who can’t afford to lose it—no matter how much they insist.
3. Draw up the proper paperwork. If a friend or family member gives you a loan, you need to put it in writing—including the amount of the loan, the interest rate, the term of the loan and how and when you will pay it back. If a friend or family member invests in your business, it’s even more crucial to document their role in the business. How much equity (ownership in the business) will they receive in return? Will they be an active advisor, partner or board member of your business, or simply provide financing? It’s important to clarify everyone’s expectations. If your brother-in-law expects to be involved in all major decisions and you just thought he was handing you a check, both of you will be in for an unpleasant surprise.

As you can see, financing from friends and family is more complex than just a handshake. But if you take the time to get it right, both you and your “financiers” will be rewarded. To get an outsider’s expert (and objective) perspective,contact a SCORE mentor today. They can help prepare you to talk to your family without drama or emotion.

• Financing / Loans
• Finance & Money

Rieva is CEO of GrowBiz Media, a content and consulting company specializing in covering small businesses and entrepreneurship. She was formerly Editorial Director of Entrepreneur Magazine and has written several books about small business and entrepreneurship.

www.growbizmedia.com | @rieva | More from Rieva

Is Hidden Gender Discrimination Hurting Your Business? Sep 30, 2014 by Rieva Lesonsky (http://smallbiztrends.com/2014/09/hidden-gender-discrimination-study.html)

Do women employees at your company feel like they’re at a disadvantage compared to men? Even if you believe you’re a very equal-opportunity employer, and even if you’re a woman yourself, your female employees may not feel the same.

A new study by Palo Alto Software polled more than 1,000 employees and business owners, both men and women, and found that women are more than five times as likely as men to have experienced gender discrimination in a professional setting.

Over half (52 percent) of women report having experienced hidden gender discrimination in a professional setting, compared to just 9 percent of men. For example, nearly twice as many women as men (40 percent vs. 22 percent) say they’ve been called “bossy” at work.

Gender discrimination isn’t always so overt, of course. Hidden gender discrimination often takes the form of being left behind in terms of advancement, promotions and salary raises because of family issues.

While the average nation globally offers 18 guaranteed weeks of paid maternity leave to workers, the U.S. offers – zero. This lack of support for the efforts involved in raising children has a direct effect on women in the workforce. More than four in 10 (43 percent) women in the survey say they’re taken substantial time off from their careers, quit their jobs, or reduced their roles as business owners to care for children. Just 15 percent of men have done the same.

Taking even a short time off can have a big impact on a woman’s future career success. For example, the study found women with MBAs who took 18 months off earned 41 percent less, on average, than women with MBAs who didn’t take time off from their careers. No wonder 27 percent of women, compared to just 11 percent of men, agree with the statement “I believe I make less money than I would without children.” And while 38 percent of men say having children had no impact on their careers, only 19 percent of women said the same.

When it comes to child-friendly policies, the survey was somewhat surprising: More than half of both male and female CEOs surveyed say they’d consider allowing parents to bring their children to the office once in a while—and more than one-third of both women and men say they’d take advantage of that opportunity.

But why did the other two-thirds say they wouldn’t bring their children to work? Clearly, in the average workplace – being a parent is seen as a liability.

Why should small business owners want to change that? Here are just a few reasons.

• Instituting parent-friendly policies enables both men and women to keep working during their most productive years—instead of forcing one parent to opt out of the workforce, even temporarily.
• Parent-friendly policies make your business a place both men and women want to work—helping you attract and retain qualified employees.
• With more women than men now earning college degrees and pursuing higher education, we can’t afford to keep forcing women to choose between career and children. If the best-educated individuals in the U.S. workforce get squeezed out, how will our businesses and our nation compete?

Take a good look at your business and your attitudes – are you guilty of hidden gender discrimination? And what could it be costing your business?

Equality Photo via Shutterstock

 

Rieva Lesonsky is a staff writer for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Follow her on Google+ and visit her blog, SmallBizDaily, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.

FIVE THINGS MEN SHOULD BORROW FROM WOMEN ENTREPRENEURS by Dr. Phil Borden Co-Founder of Essergy

Five studies since August, 2014 cite opposite trends in entrepreneurial activity.  Three highlight a general decline in entrepreneurship over the past forty years or so.  The fourth suggests the continued rise of entrepreneurship among women.  The fifth analyzes characteristics of successful women entrepreneurs.  Can we use lessons from the drivers of entrepreneurial success for women to reignite entrepreneurial growth for all?

The most recent global study cites the impact of an aging workforce in fostering a decline in new business formation.  It notes the increase in the average age of the workforce and suggests that entrepreneurial activity declines in direct proportion to that aging.  Its argues 1) that new ideas are more prevalent among the young, but the skills to transform those ideas into businesses depend on experience; and 2) the prevalence of older workers more set in their ways and concerned about their positions tends to suppress new ideas and those who generate them.

Other recent studies have accepted the demographic result but disputed this interpretation.  They suggest the golden range for new business formation is 30-40.  They sound the more hopeful note that the aging boomer population is yielding to the youth and enthusiasm of millennials.  They also may point to a very recent and short uptick in the new business formation statistics and a loosening of bank-oriented financial constraints.

Set against this trend the number of women’s businesses in the U.S. continues to grow almost a third faster.  Can characteristics of women entrepreneurs account for this difference? There has been a long standing debate about whether entrepreneurs can be identified by inborn or learned traits, whether entrepreneurship is a social phenomenon, how strongly it depends on access to assets, etc.

A recent analysis by Korn Ferry may shed light on the issue.  It compared nearly 200 women entrepreneur members of Springboard Enterprises (by far the best dating service for women entrepreneurs and sources of capital) with senior corporate executives, both female and male.  It used interviews, testing with accepted psychological instruments, and performance comparisons.  The Korn Ferry study identified personality and cognitive characteristics that may benefit entrepreneurs of any age or circumstance.  It’s results also may explain the happy successes among some women entrepreneurs.  Specifically, Springboard entrepreneurs:

1. Excelled significantly at risk-taking, learning, tinkering and experimentation, and other behaviors related to creativity;
2. Exhibited greater “change agility,” including comfort in a changing environment, and ability to both lead and manage change within an organization;
3. Demonstrated deeper thinking about root causes of problems, clearer vision, a broader perspective, and greater ability to connect disparate ideas;
4. Showed greater ease in questioning and if necessary abandoning conventional thinking and approaches to problems; and
5. Revealed greater comfort in and ability to handle management and situational uncertainty.

All citations below are from August and September 2014.

• http://www.flipsnack.com/Springboardent/kornferry-sb-alumnae-results.html?utm_source=Springboard+Newsletter+and+Alerts&utm_campaign=618415d98b-General_Newsletter_Summer_20138_6_2013&utm_medium=email&utm_term=0_bdab4ee029-618415d98b-297042917
• nawbo.org/section_103.cfm
• James Liang, Hui Wang, Edward P. Lazear, “Demographics and Entrepreneurship”, http://www.nber.org/papers/w20506
• http://fivethirtyeight.com/datalab/in-the-papers-entrepreneurs-energy-and-education/
• http://fivethirtyeight.com/datalab/dont-blame-age-for-declining-u-s-entrepreneurship/