Entrepreneurs often cite the support of friends and family as key to their success.<\/p>\n
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.<\/p>\n
While leveraging personal connections can be a significant boost for any business, according to Nobesuthu Ndlovu, Director of SME at Old Mutual Corporate, entrepreneurs must weigh up the risks and benefits of accepting funding from relatives and friends.<\/p>\n
\u201cRaising 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,\u201d says Ndlovu.<\/p>\n
There have been stories of people taking loans from family that turned out to be a big success.<\/p>\n
Take, for example, Jeff Bezos\u2019 parents, who boldly invested in Amazon when the company was established in 1995.<\/a><\/strong><\/p>\n Today, his parents might be among the top 30 wealthiest people in the world.<\/p>\n However, Ndlovu warns that this outcome is never guaranteed.<\/p>\n According to local advisory consultant Cova Advisory, South Africa has one of the highest failure rates for SMMEs, with five out of seven businesses failing within the first year.<\/p>\n \u201cThe 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.”<\/p>\n \u201cJust because your investor is your best friend, husband, or daughter, the relationship isn\u2019t made less complex,\u201d says Ndlovu.<\/p>\n \u201cOn the contrary, mixing family and business can be made more complex because there\u2019s no delineation between professional and personal.\u201d<\/p>\n Ndlovu knows that the rigorous processes associated with applying for traditional business funding can make approaching family and friends for capital more attractive.<\/p>\n \u201cOften, 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.”<\/p>\n “And very often, these institutions aren\u2019t user-friendly, making them even less attractive,\u201d she says.<\/p>\n However, seeking independent funding is often a more sustainable route in the long term.<\/p>\n \u201cTypically, 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,\u201d she says.<\/p>\n \u201cAn objective assessment, based on a business\u2019s plan and prospects, is a more sustainable option.\u201d<\/p>\n