It has always been difficult for some people to access the business finance required to grow a small business past its infancy. Research suggests that a lack of credit has impacted over a third of all business owners nationwide, meaning that they have missed on many opportunities to grow their business.
Yet, if a loan from a banking institution is not readily available, and those credit cards are maxed out, and the options are getting thin, then going to the ‘bank of mum and dad’ or others close to your inner circle comes across as an appealing option for some people. However, going to this ‘special bank’ can lead to a number of problems:
Even when things work swimmingly with the provision of capital, you have modified your relationship, and this may impact your individual experiences with them. The bank will not care about you if you are making your repayments, but that mate of yours that lent you the money may feel a sense of entitlement in policing your spending habits. Catching up your best mates may never be the same, as they ask about how business is going, but they are asking with a purpose of knowing when they will recoup their funds.
There may be questions whether the loan was provided as a gift, loan or as an investment. There is a fair chance there is no contract in place, where the contract will define elements such as length, repayment schedules and totals, and other key information. Without the protection of a contract, misunderstandings can certainly happen easily. For example, if the lender decides it is a loan, they may want their money back very quickly, outside of your normal payment schedule. They may go around thinking that if you are the next huge startup that they have bought an equity stake in it.
Failure rates in the world of small business is quite high. Whilst a lender can advise you on the viability of growth plans, your mate or family members will support you, but will likely not be as in-depth with their questioning. Whilst the process of setting about real business plans for lenders may be tedious, it helps make better financial decisions.
Thanks But No Thanks
Whilst the option of borrowing from those close to you may be very enticing, it quite often works out pear-shaped.
With careful scoping of the loan\lender market, you will find a financial partner that can help you deliver the capital that you need to grow your business