Funding Growth: friends, family and bootstrapping

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01/08/2017

Most businesses need to raise extra capital or funding at some stage in their growth. This might be needed to fund the increase in necessary equipment, staff, or other resources required for business expansion and growth.

If you don’t want to borrow from a bank or other traditional lender, a popular alternative is to borrow what you need from friends or family. Someone who loves you and believes in you may not ask the same hard questions that a professional lender or investor will. They’re more likely to give you the money you need with very few strings attached – if any.

If you’re not keen on borrowing from family or friends, bootstrapping can be an effective way to raise the funds you need. It’s about saving wherever possible by eliminating any unnecessary overheads, needless expenses and nonessential assets, and making smart decisions to generate cash flow before your business acquires too many costs.

Borrowing from friends and family

When you decide to borrow from friends or family, it’s essential that an agreement is drawn up that clearly lays out the terms of the loan. Both parties should have a full understanding of what it involves, from what the repayment terms will be to agreeing not to discuss business at family gatherings. That’s why it’s important that a lawyer is involved in the process, so that everything is crystal clear. You want to preserve your relationship with them and the best way to do this is to make sure they understand what they’re getting in to.

There are two common methods for this kind of borrowing:

• You’re given the money, and you pay it back when you can. Are they lending to you personally, or to the business? It’s an important distinction because money received by you personally (to inject into the business) impacts your estate, while money received professionally will affect your business. Make sure this is made clear.
• You’re given the loan, and pay it back with interest like a bank (lender gets slightly more than the deposit rate, you get it cheaper than borrowing from the bank).

In either case, the lender might want some shares in your business. It’s important to be clear about this, and to state it in the lending agreement.

Define the expectations of your lenders

Family and friends may ask to see your business plan before writing you a cheque, but they might not. You should send them a copy anyway, and make sure it’s clear when and how you will repay them so there are not two different sets of expectations.

Clear communication is essential

Clear communications between both parties should help to openly define:

• Expectations about repayment.
• Any involvement or implied rights in your business operations.

Hire a lawyer

Hire a qualified lawyer to work with you to develop an agreement – and insist your family members review the document with their own independent counsel. Money can change things, so it’s imperative that all parties can refer to a well-constructed agreement that’s signed before any funds are transferred. A legal agreement protects your family too, because they’ll know their rights in case something happens to you or your business.

Bootstrapping

If you don’t want to borrow money, or you haven’t been able to interest investors, don’t give up. You might still be able to raise the capital you need for your business growth plans by bootstrapping your business. You can:

• Reduce your salary. Look at the bare minimum you’ll need for your own living expenses and cut your salary down to that amount.
• Sub lease any spare space to another business, or sub lease from another business temporarily.
• Employ part time staff or have family help out in the early days.
• Defer any payments for as long as you can.
• Access stock/raw materials on consignment (only pay once it’s sold).
• Hold inventory virtually via a wholesaler.
• Save on marketing dollars by partnering with other business in joint promotions.
• Share office space with other like-minded businesses.
• Use free advertising tactics such as social media.
• Sell any business assets that are under-used, and lease them back when you need to.

Summary

In both cases, it’s important to do your due diligence and to be prepared. If you agree to borrow from friends or family, make sure that they understand the terms of the loan and have those terms clearly laid out in a legal agreement.

When bootstrapping, be clear on what you need the extra funds for, and how much you’ll need. You can then identify where the best savings can be made to meet those funding goals, and prepare your business for operating on a shoestring for a while.