Getting friends and family to back you can be a risky business

Entrepreneurs often say the support of friends and family is the key to their success. 

A widely cited study by a leading bank in North America suggests that most small business owners — 83% — enjoy the emotional and operational backing from family and friends, with a third receiving financial support in the same period.

While leveraging personal connections can be a boost for any business, according to Nobesuthu Ndlovu, director: SME at Old Mutual Corporate, entrepreneurs must weigh up the risks and benefits of accepting funding from relatives and friends.

“Raising money from your personal network can be great in attracting future funding as it demonstrates that you are grounded and have acquaintances or family who have already bought into your business,” says Ndlovu.

There have been stories of people taking loans from family that turned out to be a big success. Take, for example, Amazon founder Jeff Bezos’s parents, who boldly invested in his tech company when it was established in 1995. Today, his parents might be among the top 30 wealthiest people in the world. 

However, Ndlovu warns that this outcome is never guaranteed. 

According to local advisory consultant Cova Advisory, SA has one of the highest failure rates for small, medium and micro enterprises (SMMEs), with five out of seven businesses failing within the first year.  

“The next family braai may not be so great if half the family there are disappointed with poor outcomes or are annoyed because you went on holiday before paying back their money,” says Ndlovu.  

“Just because your investor is your best friend, husband or daughter, the relationship isn’t made less complex. On the contrary, mixing family and business can be made more complex because there’s no delineation between professional and personal.”

Ndlovu knows that the rigorous processes associated with applying for traditional business funding can make approaching family and friends for capital more attractive. 

“Often, in the daily running of a small business, there is no time for entrepreneurs to submit a detailed business plan to get access to finance. And often, these institutions aren’t user-friendly, making them even less attractive,” she says. 

However, seeking independent funding is often a more sustainable route in the long term.

“Typically, investors do not get involved in the business’s day-to-day running, and a family member might feel entitled to this level of involvement, which could create problems,” she says. “An objective assessment, based on a business’s plan and prospects, is a more sustainable option.”

Innovative funding platforms such as SMEgo, which connect small business owners to multiple funders, can help take the pain and drama out of getting small business funding. 

“Powered by Old Mutual — business owners only need to apply for funding once. This application is matched with multiple suitable funders,” says Ndlovu. “This makes the application process fast, flexible and transparent as each application can be tracked.”

“As a bonus, entrepreneurs also get access to support and mentorship to help make a success of their venture in addition to the love and support of their family,” she says.

As with any business decision, Ndlovu urges entrepreneurs to consider their funding options carefully.

“Just because it’s family doesn’t mean it will be easy — in fact, in some ways, it might be even harder on you in the long term,” she says.

For more information on SMEgo, visit smego.co.za

This article was paid for by Old Mutual.