The process of finding funding for your business can be arduous. Not only do you need a solid idea, but you need to find the time to create a compelling pitch and business plan. You also need to network with potential investors and apply for bank loans. The time and effort it takes to raise the funds for your startup can quickly get out of hand, which may be the reason that 29% of new small businesses run out of cash and fail.
Entrepreneurs without money set aside or unable to qualify for enough credit, turning to friends and family members is often the easiest way to acquire the funds they need for their business. In fact, 38% of startups are funded by friends and family members. This is more than all businesses funded by bank loans, venture capital, and angel investors combined.
Given how many startups are funded with money borrowed from people in your personal network, we wanted to see just how easy it would be to raise funding this way. We surveyed 1,000 Americans on whether or not they would loan a friend or family member money to start their business and found that 82% of people would not loan a friend or family member money to start a business. Other important findings include:
- Men are 25% more likely to loan a friend or family member money for their business than women.
- Young millennials aged 18–24 were the most likely to loan a friend or family member money.
- Those in the Midwest were least likely to say they would loan a loved one money, with just 15% saying they would. Northeasterners were the most likely to say they would loan their loved ones money, with 21% saying they would.
Nearly 4 in 5 People Would Not Loan A Friend or Family Member Money to Start Their Business
Our survey showed that most people would not feel comfortable loaning a friend or family member money. This may be because many people are very aware of the strain money puts on a relationship, or have even already lost a friendship over money issues. According to a survey conducted by Bank of America in 2017, 53% of consumers have seen a friendship end over money disputes. It may also be that a majority of people simply don’t have enough money on hand to lend to a friend or family member. According to another recent study, 69% of Americans have less than $1,000 in savings, which doesn’t leave much to spare for an entrepreneurial friend.
Our findings show that despite the fact that raising capital among friends and family tends to be one of the most successful routes of funding for startups, entrepreneurs should still expect to face more rejection than support when asking for funding.
Women Are Less Likely To Loan Friends or Family Money Than Men
We found that women were slightly less likely to say they would loan a friend or family member money than men. 20% of men said they would loan a friend or family member money, while only 16% of women said the same. This may be because women are usually less likely to talk about money — a study conducted by Fidelity found that 80% of women are uncomfortable talking about finances with family and friends. Women may, therefore be less open to financial proposals in the future and feel less confident that they will be able to ask for the loan to be repaid.
Millennials are More Likely to Loan Friends and Family Money Than Other Generations
Young millennials were the most likely to say they would lend friends and family money, with 26% of respondents aged 18–24 saying they would loan the funds. This may be because this group is also the most likely to ask for money from others. According to a recent survey, 51% of Millennials have accepted financial help for basic needs, which is more than any other generation. Millennials may therefore be more understanding and receptive to another’s financial needs.
Some might argue that millennials’ willingness to loan friends money is due to their lack of financial knowledge and experience. However, studies have shown that twice as many millennials have received formal financial education as compared to Gen X or baby boomers. In addition, millennials tend to be more open to talking about finances with partners, friends, and even coworkers. A survey conducted by Bankrate found that a third of millennials would disclose their salary to a co-worker, compared to only 18% of baby boomers.
It’s possible that millennials’ attitudes towards money and finances have been shaped by the financial crises they’ve witnessed and their struggles with more debt than any other generation. They may understand more than others that complete financial independence is difficult without help from friends and family.
That being said, those over 65 were the second most likely group to say they would loan a friend or family member money. As this age group has likely accrued greater savings over their longer lifetimes, it may be a better idea to ask older relatives above 65 for help starting your business before you ask a millennial.
How to Raise Funds From Friends and Family The Right Way
Asking friends and family for money to start your business may not be as straightforward as it seems. You will likely have to ask many different people in order to raise the capital you need, and receive many rejections. This does not mean you should give up, but it does mean it’s important to be as prepared as possible. Think through your business goals and financial needs before approaching someone for money in order to give yourself the best chance of receiving funding from friends and family, while minimizing stress on the relationship.
Keep these tips in mind to help you achieve your funding goals:
- Explain Your Business Plan: Demonstrate you’ve thought things through by outlining a thorough description, market analysis, and financial projection.
- Ask For a Specific Amount: State the exact amount you will need in total to show you have a solid understanding of business finances.
- Decide on The Terms: Clarify whether the lender is expecting repayment, equity in the business, or if the money is a gift.
- Sign a Loan Agreement: Show you’re serious about repayment by signing documents stating how much you owe or do not owe.
- Tie Repayments to Your Business Growth: Manage expectations by paying back your friends and relatives as you earn money.
This survey revealed that the majority of Americans would not loan a friend or family member money, but that does not make this method of fundraising unviable. Because people are hesitant to talk about money and worried debt may ruin a relationship, it’s important to detail your business idea as much as possible, and make clear your plans for your repayment. Small business funding takes time and effort no matter the method, and you should remember to remain patient and flexible as you strive towards your goals.
Data used for this article can be found here.