When you’re starting a new small business, sometimes you don’t have the cash to start with in order to get up and running. At this stage, entrepreneurs often either turn towards their own personal savings, or they ask those in their inner circle to help them grow their business.
In startup lingo, this is often referred to as “the friends and family round,” and typically occurs at the very beginning stages of starting the business. However, it’s not just for tech startups - small businesses from restaurants to plant nurseries and beyond can run a friends and family round.
Read on to find out how you can run a friends and family round for your small business - and how you can leverage these tips to make the most out of your crowdfunding campaign!
Growing your business doesn’t have to be difficult, with friends and family on your side
A fantastic way of accessing capital for your business is by bringing your friends and family into your growth! Honeycomb Credit makes this process easy by giving you a platform to crowdfund your growth from the ones that love you most. Learn more by filling out the form below!
Decide how much you’re going to need, and how much you think your business is worth
The first step to asking your friends and family to finance your business is to first come up with a number of how much money you think you’ll need to get going.
Sometimes this can be something concrete, like, “I need enough money for a down payment on a building where I can run my business out of,” or “I need money for two month’s inventory to get me started.” You can easily run the numbers and decide for how much you might want to ask.
The key here is not to come up with a number that you think is the most money you can pull - instead, think strategically about how much you’ll need at minimum to get up and running. By asking for a minimum and then using it effectively, you can then open the doors for more funding in the future. After all, people would be more willing to lend to someone who can use their money economically than to someone who just tries to pull as much as they possibly can.
Your next calculation is going to be how much you think your company is going to be worth in the future. At this stage, you might not be able to get concrete numbers because you’re making little to no revenue.
Luckily, when you’re raising from family and friends, this part is a bit less important. Typically, they want to see you succeed, so the valuation of your business isn’t front-of-mind. Still, if you’re able to give some sort of a forecast as to how you expect to grow the business, it would greatly strengthen your pitch.
Choose what kinds of investments you’re wanting to take
The next step is to determine the kinds of investments you’re willing to take for your business. With friends and family, there are three major routes you can take, which coincidentally mirror the three major kinds of crowdfunding tools.
Gifts
Receiving gifts to start your business is exactly what it sounds like - someone gives you the money without expectation of repayment. Gee, what a nice friend!
While gifts are a great way for early-stage entrepreneurs to raise money from family and friends, make sure that you have some sort of formal agreement in place with them before taking their money. You don’t want them going back on their offer or expecting something (like equity) you didn’t promise them when you do eventually become successful.
Equity
Equity is another common way that small businesses of all stages raise money. Essentially, it means that your friends or family members buy a piece of ownership in your business. In exchange for some upfront capital, they’ll be entitled to a percentage of your profits in the future.
This can be a good way to include your friends and family in your business’s growth, because it’s a scalable way of allowing them to share in your profits, but with that in mind, you will be giving up some of your profits.
Here, you also want to make sure that there’s a formal agreement in place so that everyone knows how much ownership is allocated to whom, and how much your friends and family will have any power over business operations. Investing inherently holds risk, so make sure that your family and friends understand that they might not get a return on their investment, and that you all have plans in place if it doesn’t happen for you.
Small business loans
Another common way of raising capital from your family and friends is to take out a loan from them. Here, you borrow a principal amount of cash and agree upon a time frame to pay them back, plus interest if they want to include it. (They are your family, after all, they might just be happy to get their money back with zero interest).
With a small business loan, it’s more of a one-and-done situation - you’re not keeping people involved in your business for an indefinite period of time, and you’re not giving up ownership or profits.
As with the other two methods of raising money, it’s important to have a formal agreement in place. Here you might want to use a third party such as a peer-to-peer lending platform or some legal advice as to how to set up the agreement. Crowdfunding is also a great option to have a third-party available to facilitate these investments.
Determine the right friends and family to reach out to for investments
As much as you may dearly love your family and friends, you want to be careful about who you accept funding from.
Firstly, you want to be positive that the person you’re borrowing money from can stand to lose that amount of money, and is comfortable taking on risk by investing in you. It wouldn’t be fair to you or them to take money that they need.
Second, it might be a good idea to choose family and friends who have some business acumen already. They’ll be able to judge whether they think your business can make it, and provide advice that perhaps you’ll find valuable. If they take an ownership stake in your business, that can also benefit your business in the long run because of their experience.
Finally, you want to be sure that the people you reach out to for capital are people who you trust will be able to separate the business from the personal. Money can make things a bit complicated for relationships, so you should be sure that whoever you raise money from can emotionally handle it as well. This is why it’s so important to get a third-party or some kind of formal and/or legal agreement involved to mitigate the financial side of things.
Draw up terms sheets and a repayment schedule
We alluded to this before, but term sheets and repayment schedules are formal, written agreements that you make with investors which show the conditions of the investment and how you plan to repay them back.
You can find templates for term sheets online, but the basic components of one are who you are, what kinds of notes or stocks you’re issuing, the rights that the investors have, how much they’re planning to offer you, and your valuation.
A repayment schedule is essentially how you plan to break up the process of paying back a loan, if you go that route. You basically break down how long you plan to take to repay the principal plus interest, and how much of a monthly payment you’re able to pay back.
Having these documents ready to go will keep both you and your investors accountable, making them an important part of the friends and family round.
Keep your investors updated!
Once you’ve borrowed or received the money from your friends and family, it wouldn’t be right to just take the money and leave it at that! After all, your friends and family who invest are more motivated in seeing you succeed, and they deserve the chance to see the progress you and your business are making.
This can be periodic check-ins, posts on your social media, that sort of thing as you begin the early stages of getting your business up and running. Having these regular updates on your business helps your investors feel like they’re involved, which they are.
Another great way of thanking your family and friends who invest in your business is by inviting them to any events that you throw for your business. A soft-opening, maybe, or a thank-you to investors party can go a long way to creating more goodwill between you and your investors.
Friends and Family: the secret to a successful crowdfunding campaign
Fun fact: all of these previous points are just as applicable to crowdfunding as they are to any other kind of way to raise money for your small business.
We often encourage small business owners who crowdfund to reach out to family and friends first to make up the first 10 percent of their campaign’s raise. This is because they’re often the people who’ll be most willing to chip in and believe in your business, but their support also shows up to others and motivates a wider range of people to invest in your business.
The added bonus of including your friends and family in your crowdfunding campaign is that they will also be integral in marketing the campaign. They’ll want to shout-out your business every chance they get - not just because they’re your family and they love you, but because they’ve invested in you!
Raise funds with the ones who love you most
Whether you’re crowdfunding or you’re seeking out loans and capital from investors for your business, looking to family and friends can be a great way to start out.
Learn more about crowdfunding a small business loan with Honeycomb, and fill the form out below for more information.