How to find the funds for my start-up?
Financing my startup with money from family and friends; a good idea?
Although the first source of funding for the entrepreneur is usually his own funds, money from relatives and friends is often the first recourse in case of need. Indeed this type of funds is referred to as “love money”. This type of investment is referred to as “patient capital”, meaning that although it is sometimes subject to specific repayment terms, it is more forgiving than a loan from a banking institution or other sources. However, is it always a good idea to borrow money from family and friends?
Of course, there is the whole emotional issue of ego, the stress of succeeding, the interference of certain people in your operation, etc. Beyond these initial considerations, it is essential to clarify the terms of the loan well before obtaining it. For example, what is the term of the loan? Is it only a loan of money or will your family member or friend be looking to become a shareholder in your future business? There is nothing more complex in business than interpersonal relationships, especially with family and friends. That’s why it’s important to keep your feelings separate from your business relationship because things can quickly get out of hand.
Here are some tips on how to handle this type of situation:
- Show your business plan to your family and friends before you ask them for money. This will have the effect of demonstrating the seriousness of your approach.
- If you are offered financial assistance, think about how much you really need and show your investor that you are building the repayment of this loan into your financial model. If someone wants shares in your business in exchange for their down payment, take the time to think about it.
- Make sure you are very transparent about your business finances. Never lie about your difficulties and always try to meet your payment deadlines.
- Sign a clear document as to the terms and conditions of payment and make sure you have a copy.
- Don’t forget to say THANK YOU!
Applying for a loan from a bank for my business, how does it work?
For the longest time, banks were the primary sources of financing for businesses. Although the world has changed a lot, it is still natural to go to the bank to get a loan or line of credit. There are many stories and even urban legends about how financial institutions finance start-ups. So in this third article, I will try to temper your expectations and give you the straight goods.
Banks like to finance projects with a few years behind the belt.
True. It is important to understand that this is not a reflection of the quality of your start-up project, but a calculation of the risk involved in relation to the business. Indeed, a start-up requires high start-up capital and only presents projections, without tangible data. Banking institutions, in their risk protocols will look more to finance a company that has “already proven itself” and therefore has about two years of existence.
Banks never fund startups.
False. Although it is easier to obtain financing after 24 months, a banking institution may decide to finance a startup that has a good business plan as well as a reliable financial model. It is true that some sectors have more difficulty receiving financing, but it is still possible to receive a portion of it from the bank to complete your financing strategy. Furthermore, banks can often offer financing when the individual has collateral to offer, i.e. assets with a certain value that serve to secure your loan. Certainly, a young entrepreneur doesn’t necessarily have a condo and a ton of assets to put up as collateral!
You generally need to have equity invested in your business to get financing from the bank.
True. “Equity” is considered money invested by family and friends or yourself. It shows that you have equity in your business and are aligning your interests with those of your creditors. This is often a criterion before getting a line of credit, a loan or even applying to a government program.
Banks often like to create “funding partnerships” with other entities.
True. Indeed, banks like to share risk with other lenders including notably the government at the level of programs such as that for small business financing. More often than not, this allows for diversification in financing. Hopefully this article sheds some light on the subject, I strongly recommend that you sit down with your banker and discuss your future plans!