Friends in need
Article Date: Apr 15 2009We all want to see our friends and family members succeed in their business enterprises. But not everyone would go as far as lending them money.
Attitudes to this issue vary widely. For example, it’s well known that in China people excel at saving, building up fortunes on modest incomes. And yet they can be completely reckless in lending large amounts of money to their loved ones to fund speculative business enterprises.
Here in the West, many believe that business shouldn’t be mixed with friendship, but it happens all the same. Stories are all too common of unpaid debts festering between friends and family relationships turning sour over money matters.
In theory, the trust that already exists between friends or family members should be an excellent foundation for doing business together. But problems can occur when that trust breaks down under new pressures, putting both the business and the relationship in jeopardy.
Ben Taylor, the co-founder of software company Fatsoma, borrowed £15,000 from the bank to start his business, secured against his father’s company. After he burned through that money, his father invested a further £25,000. A few years later and Fatsoma has sales of £2 million.
The secret to making this sort of arrangement work, according to Taylor, is that you must be ‘completely open’ with each other. That’s not always as easy as it sounds, especially with the complex mixture of emotions involved in family relationships. But as a result of this approach, both Taylor’s business and his relationship with his father have benefited.
With banks more reluctant than ever to lend to start-ups, many more entrepreneurs will be looking at the ‘friends and family’ option, whether the investment comes in the form of a loan or an equity injection. If they are lucky enough to secure funding from a generous relation or acquaintance, they would be ill-advised to take such support for granted. If nothing else, treating an early backer in a professional manner is good practice for the trickier challenge of managing external investors.
The next issue of Business XL tackles the thorny question of tapping friends and family for cash. Company directors and entrepreneurs can subscribe for free.
