First Stop: The Bank of Family and Friends
Actually, that should be your second stop. As stated above, any lender or investor will want to see that you have your own resources invested in the business before they put up their money. However, many entrepreneurs still need additional funding in the startup phase, and friends and family are sometimes willing to provide that funding on favorable terms. "We did the whole nine yards in our financing search, starting with friends and local investors who knew us," says Michael Mark, CEO of Ed Map, a Nelsonville, Ohio-based company that provides software and support services for online learning, corporate training and multi-campus colleges.
Mark focused on telling Ed Map's story to people who were successful in the local community and seemed willing to take a chance on another local entrepreneur. Not only did that funding provide critically important financial support during the company's early years, it helped Mark develop the skills he would need to obtain additional funding from other sources down the road. "In my case, the biggest challenge I faced at the outset was a lack of knowledge about how and where to get outside funding," he explains. "Once you know the ropes, it gets a lot easier." Eventually, Ed Map also received funding from venture capital firms and from the state.
There are some issues to keep in mind when seeking financing from family and friends. For example, startup businesses are inherently risky ventures, and you need to make family and friends aware of those risks. Also, it's generally best to follow professional standards when structuring and documenting loans from family and friends. Failure to do so could have negative tax implications for both parties down the road, and it could also hurt your chances of securing financing from more traditional sources in the future. Peer-lending sites, such as Prosper (www.prosper.com) and Virgin Money (www.virginmoneyus.com), provide an easy way to structure these loans.
