Using your family to bankroll the business

If you can raise a family then you can build a business, or so the old saying goes. But building a business thanks to your family is a different kettle of fish. 

Family has always been instrumental when it comes to starting a new business. For a start, there’s nothing more important than the emotional support a family can give you. This support, this enthusiasm, is an essential crutch when you’re about to embark on one of the most stressful and exciting periods of your life.

Yet, occasionally, aspiring entrepreneurs will need to request more than a bear hug at family gatherings. Asking for money, especially from family, is tough. Entrepreneurs often don’t need much – £100 for a week of food until the next funding round is done, or perhaps a loan to pay the rent for a month. And they wouldn’t be alone. Richard Branson’s mum saved Student magazine from closure with £100 from a necklace she sold when it wasn’t claimed after she had handed it in to the police; Sam Wallon borrowed $20,000 so he could kickstart Walmart. 

While most would probably prefer to rely on the bank and keep family out of business, getting a bank loan isn’t easy. If you have any debt the chances of getting a loan is low, even with the UK government’s commitment to supporting new businesses. Similarly crowdfunding can yield great responses, but without strong marketing, it can feel a little like asking friends and family to dig deep into their pockets anyway.

Entrepreneurs are starting to look at ways they can give something back to their families rather than just accepting handout after handout. Understanding the net worth of a parent is essential before asking for money, or putting a proposal together. Work out if their investment in your business could harm their retirement plans or your sister’s college fund. If the answer is yes, then it might be worth looking at other peer-to-peer lending sites like Prosper and Kickstarter.

Otherwise, entrepreneurs looking for alternative funding should seriously consider asking their parents, on the one condition they’re treated like a serious investor. What benefits should they get? Equity for sure, but what about interest, or a contract just in case it doesn’t work out?

Making the whole process formal is important. Relationships can go sour, even within a family unit. Brian Lonsdale, the managing director of Smarter Digital Marketing went to family for funding after growing frustrated with working for other businesses. After starting to work from home for a new business he and his new partner needed more money to expand the business. “Our plan was to hire more staff and get an office in the heart of Glasgow.”

Read more: The pros and cons of running a business with your brother

He explains how he needed more cash, so his partner turned to his father, while Lonsdale asked his uncle. “The investment was in the form of money assigned as debt to be paid to the relevant family members once we were able to reach a comfortable and enthusiastic target of yearly income. Due to having the money placed straight into the business account, it was easy to persuade my uncle. Having this money has focused our efforts to progress as quickly as possible to pay off these debts.”

Lonsdale explains his motivation for success was to not have these debts to his family.  

Using parents or family members as a channel to secure funding could mean that the family relationship change. Work becomes something they are just as involved in as you. For Daniel, who asked to remain anonymous, asking his family to fund his business was ‘the worst idea I’ve ever had.’

Daniel is running a social media company in East London, which is ‘ticking along’. He asked his father to loan him £2,000 in exchange for five per cent monthly profit when the business took off. As he’d managed to hold a successful job in finance for the previous five years, his father agreed.

I’m worried our personal relationship will become strained.

“The problem is living costs have become so high in London paying for office space, staff, rent, day to day, that I’m not making any profit at all. Now on the phone I just feel like my dad is wondering where the money is. I’m too proud to admit that yes, my business is running, but I can’t afford to pay him back just now.”

Daniel explains that he feels like he’s cheating his father. “I promised him a return and I can’t provide. I’m worried our personal relationship will become strained.”

Are there any business advantages to getting loans from your family other than to avoid potential high interest rates from banks? Chris Simpson, a small business consultant with Business Doctors says: “One of the biggest benefits is that you know them inside out. And it's just for this reason that I didn't go into business with my dad! But for some parent-offspring pairings, this insider knowledge is what gives them confidence in their ability to work together, make the most of complimentary skillsets and take their relationship to a new level. Another benefit of going into business with your parents is that more than likely, they've seen it all before. They've lived through more economic cycles than you have, which gives them a kind of long term perspective that you cannot match.”

Read more: How to follow in the footsteps of successful family businesses

However, Simpson adds: “Family members have to find a way to hold each other to account, without damaging their relationships. All too often, family members carry and protect each other to the detriment of the business.

“Getting in an outsider perspective from a business consultant can be the best way to untangle what is really going on in a family business and to improve its efficiency and ultimately profitability.”

Looking for non-traditional funding sources can feel daunting, but eventually, it might be the best way of securing a loan. Who knows? You could be following in Richard Branson’s footsteps.

This is a guest blog and may not represent the views of Virgin.com. Please see virgin.com/terms for more details. Thumbnail from gettyimages.

Comment

Our Companies

Quick Links