Why investment from family can be the best option

It’s unlikely to demand high levels of interest; it’s probably not going to want to go through the business plan with a fine-toothed comb; it offers an ideal solution where traditional investors turn their backs. The bank of mum, dad or other relatives can offer hassle-free financial support and it’s well and truly open.

A 2014 survey of 1,226 SMEs by the Institute of Directors showed that 29 per cent of them had had a loan or overdraft application rejected and only 20 per cent said that accessing finance was easy for them. Businesses are starting to turn to family and friends to raise capital – the survey put the figure at 15 per cent – despite concerns from some in the financial industry that though their support offers greater flexibility, it restricts long-term growth.

“18 months ago, I invested in my new business venture, the online e-retailer Blossoming Gifts, with my dad, who put in 50 per cent,” says Tash Khan, co-founder of Ecomnova, which oversees a number of other brands including Appleyard Flowers. “The benefits of investing with him is that I already know and trust the other majority stakeholder. He too couldn’t sack me, which is a positive.

“On the other hand, when it comes to borrowing money from the bank he has to act as a guarantor. Therefore if the business doesn’t succeed and we end up owing money to the bank, my retired dad’s financial well-being would be put at risk. With no working income, his pension, life savings and home [could all be gone].”

Turning to family to kickstart a business can make perfect sense for personal reasons, says Gemma Pond, who founded Nuva, a drinks brand, just over a year ago.

Pond initially pooled her savings with her husband’s – around £50k was spent on designing the bottle. The company has gone on to acquire £1m funding from a group of City investors, which will help promote their profile in the media and on the high street, and allow them to push for an international presence. “I think self-funding worked to get us off the ground, but it absolutely has a limit. We certainly couldn’t keep self-funding forever,” says Pond.

The emotional and psychological benefits of having a co-investor’s unwavering support can often outweigh the financial gains. For Pond investing with her partner went hand-in-hand with her personal life. Eight months into the process, and the same week as the official launch, she had a baby. The support they – including her business partner and former Evian marketing director, Christine – gave each other as a result acted as a glue which strengthened their team bond

“I’ve found that more and more my business has become my family… heightened I think by self-funding the launch,” Pond adds. “So the thought of someone trying to launch a product to market without that support, to me, just would not work.”

Having the financial backing from a relative is no guarantee that a business is more likely to succeed. It can though offer something that failing and not being able to repay a bank loan can’t. As Ted Nash, co-founder and CEO of Tapdaq, a mobile ad platform, found out.

“My sisters' investment allowed me to learn one of the most important lessons you can as an entrepreneur – how to deal with failure. I was 12 years-old and had just built and sold my first business, Rediz, an affiliate shopping portal, and wanted to start on my next venture. So I approached my sisters and asked them if they would help me buy a search engine, after having toyed around with a few other ideas,” says Nash.

“They collected all the money they had from Christmases, birthdays - everything they'd been saving. I used this to help me buy the engine for around $50,000; then just six months later, I lost absolutely everything.

“My sisters were there for me and allowed me to grow as an entrepreneur by not only investing their money in my idea, but by believing in me. Thankfully I've been fortunate enough to get over that initial failure as a 12 year-old boy and been able to pay them back – if a few years later than they'd have hoped.”

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

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