Page 84 - Azerbaijan State University of Economics

Ali Y. Abbasov: Modern Venture financing options in the U.S.A.

family and friends might seem a great alternative to borrowing from banks, it has definitely own

advantages and disadvantages. Usually, friends-and-family financing is informal. Entrepreneurs

mostly don't have to write a business plan beforehand. There are clear benefits to approaching

family or friends for a loan or investment rather than conventional sources. Generally, they will

be flexible. Friends or family may offer loans without security or accept lower security than

banks. They may also lend funds interest-free or at a low rate. Most family loans are interest

free. You pay back what you borrowed and nothing more (Elaine P. 2012).

Another advantage of borrowing from family or friends is if business doesn’t go well,

chances are your relatives will be understanding, whereas other creditors will do everything

possible to ensure that you live up to your contractual obligations (Elaine P. 2012).

For both loans and investments, friends and family may allow you a longer period than formal

lenders to repay the loan or start making returns on their investment. In addition, family

members who invest will want to see it succeed, so much so that they will probably do anything

they can to help. Banks on the other hand are in the business of lending and won’t provide

entrepreneur with any assistance whatsoever, other than the initial loan.

There are also drawbacks of borrowing from family members or friends. Borrowing

from family and friends may be detrimental to your self-esteem. Many people who depend on

others for financial support feel bad about the fact that they are not fully self-sufficient. This lack

of confidence can hurt your business (Jane S. 2009). Business owners that borrow from relatives

are often pressured into listening to suggestions and advice that may not always be sound.

Aside from self–financing and family and friends, there are outside options for financing

a new venture. Business angels are wealthy individuals who are willing to invest in early-stage

ventures and in exchange receive a share of any financial rewards (Leach, 2012, p. 108).

84