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Why Do Small Businesses Raise Money From Friends and Family?

Small businesses face many challenges and one of them is obtaining funding at the beginning.

We noted that 42 percent of entrepreneurs go to family and friends to raise money. Annually this figure is $50 to $75 billion for U.S. startup companies, which is about three times greater than funding from either angel investors or venture capitalists.

A further breakdown has shown that 82% of funding will come from either an entrepreneurs’ own savings or from friends and family. A number of reasons can be attributed to this avenue and here’s a few.

Immediate Funding Right Away

To raise money, going to family and friends can result in immediate funding. By approaching these connections, the entrepreneur knows they will already have available funding and he can avoid going through extensive financial background checks and voluminous paperwork.

Small businesses may also lack some business savvy and by going to family and friends they may be more comfortable talking about the opportunity and asking for money.

Only Available Funding at the Beginning

For some small businesses, funding from family and friends may be their only source at the start as sometimes banks and government grants may not be available to them due to a lack of credit, a business track record or an established business model.

It is family and friends that will fund the small businesses at this time. Entrepreneurs will then focus on creating their products, services, business models, offices and business plans.

You already have a relationship with family and friends: they believe in you and your vision

For many entrepreneurs, their small businesses have been a dream for quite some time and a passion. When this is the case, they have likely been speaking about this with family and friends, gaining their support and sharing their vision.

Family members as potential sources of funding may include parents, grandparents, aunts and uncles, neighbors as well as childhood friends.

By receiving funding from this group, they are investing in the entrepreneur’s small business because they believe in him. They also know his desire to succeed and his work ethic.

Family and friends invest in people, not necessarily small businesses.

Lower or no interest on the loan

By going to family and friends, they may charge a lower interest on a fundraising loan as they know your current financial situation. Small businesses will also be able to avoid fees and penalties by structuring through families and friends.

In some situations, the money may even come as gift, further decreasing extra costs and excluding interest. The loaner may have an interest to give additional funding in the future and become a partner.

This can provide small businesses with an opportunity to put more money into the business right away while paying off the loan and not worrying about financial constraints.

Lower attorney fees

By receiving funding from family and friends, the structure of the loan may be less complex and require less documentation. It is important to have an attorney review this but by setting it up in a simpler manner, future changes may be less intensive and costly.

Regardless of the amount borrowed from family and friends, it is still important for small businesses to have a business plan and proper documentation as well as act in a professional manner.

Have these reasons further spurred your interest in borrowing from family and friends? Here’s a success story that may inspire you.

Nike Started with Family and Friends

Philip H. Knight, co-founder and the current Chairman of the Board for Nike, Inc., got the idea for his business when he wrote a business plan for a Stanford MBA class assignment in the 1960s. He dreamed up a company that would sell shoes to athletes through the paper, “Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?”

This assignment was to answer the question of whether or not a shoe could be designed and manufactured for less with better quality than the current market leader for athletic shoes, Adidas.

Knight was so inspired by the assignment he then went to Japan and met with Onitsuka Tiger Co executives, a manufacturer of fake Adidas shoes. He said he was the head of a fictitious company named Blue Ribbon Sports and that he wanted to distribute Tiger shoes back in the United States. Tiger officials accepted his pitch and sent samples to him after Knight said he would give them a big order once after he showed them to his business partners (but no, he did not have any).

When he returned home, Knight borrowed $500 from his father to start his business and pay for shoe samples. Keep in mind this was the 1960s and in today’s dollars and cents, this is equal to about $3,700.

After Knight received the shoes, he sent some to his old running coach Bill Bowerman, hoping he would purchase them and show the shoes to his runners.

It turned out even better: Bowerman gave Knight $500 and the two became partners in 1964.

The rest you could say is history.

8 Things Not To Do When Building A Business Online

Building an internet business can be one of the most rewarding things in the world if you are actually able to figure it out and make money. Done properly, it can allow you to have the freedom in your life that you desire.

But for many people trying to work from home, building an internet business can be frustrating and overwhelming, and can take months or even years to make your any decent money at all.

Unfortunately, when looking for a legitimate way to make money on the internet, most people today are bombarded with promises of easy riches, and many times they buy into them simply because they hope that something might actually work. But most of those promises don’t work, and then we are left with a feeling of being too gullible or of never finding a solution at all.

But the internet is a viable way to create an income if you know how to use it.

In order to help you get your business online or to start one, I would like to share a few of the things I did have learned in my first couple years in the industry. Hopefully, you will be able to learn from my mistakes.

Believe in what you are doing no matter who tells you it’s stupid.

As with most home based business models, the majority of your warm market are likely not going to believe that you can build a legitimate online business. It’s too far out of the box for most people and they have probably seen you struggling to do it up until now. But if it’s what you want to do, then persevere because building any business takes time. Find people online who are actually having success. Connect with them, become friends, learn what they are doing, and grow your positive circle of influence within the internet industry. It may take time but eventually you will be able to say you did it, and silence all those people who said you couldn’t.

Understand the program you join is not the main reason you will succeed.

I was a jumper for a long time. I looked at a zillion business opportunities over the last few years, always thinking I had found the answer. But what I learned is that the only way to become successful in business is to work on yourself first. If you can develop your leadership and marketing skills, it really won’t matter what company you join because people will want to work with you. If you develop yourself first, you will have success both financially and personally. Believe it or not, it’s not the money that is the most rewarding in the end. The biggest reward is the person you become and the personal empowerment that comes with it.

Don’t try to do it all by yourself.

By nature, I don’t like being told what to do. And I am a little bit stubborn. You can ask my husband if you like. So when I started out, I wanted to do things my own way for a long time. But I found out pretty quickly that building an internet business can be a lonely and overwhelming place if you are trying to figure everything out yourself. Find a mentor who is doing what you want to do, and let them help you. It’s more efficient and way more fun when you have others with you.

Understand that internet marketing is not easy.

These days, a lot of people are online looking for a way to make some quick money. But making money online is just like making money offline. You need to know how to market to get customers, make sales and earn money. There are a lot of scams out there and my advice is that if you want quick money, go get a job. But if you want to build a real business for the long term, then you are going to have to learn some new skills and apply them. It’s not rocket science, but it’s not push button easy like some people try to make it seem. If you can learn to set up a unique sales funnel for your business and then drive traffic to your funnel and build a relationship with the people who connect with you, over time you will build a large list of followers an make money connecting with them. And the good news is that you can make as much as want once you know how.

Focus on one thing.

This was really hard for me. I was trying to learn and absorb and much as possible and I was checking out everything anyone who was making money was doing. Believe me when I tell you that if you try to do it all, you won’t get any traction. Choose one marketing method that you like and focus on until you master it. If you spread yourself too thin, nothing will work. If you focus, you will excel in it.

Put your blinders on.

Success with online business depends very much on learning to say no to anything that is not directly related to helping you reach your goal. Every time you start something new, you start from scratch. So decide, right now, what kind of business you want to build, and focus on marketing it a little every day.

Get a unique sales funnel set up for your business as quickly as possible.

I watched and studied successful people on the internet for a long time. And over time, I learned not to do what they say, but to do what they do instead. All of the top marketers have a unique capture page for their business and a unique series of follow up emails that they wrote themselves. Stop sending your your company’s replicated website and market yourself first. By truly becoming the leader that is within you, setting up your own sales funnel, and authentically helping other people, you can promote your business on the ‘back end’ and thrive. Having a unique sales funnel is something you need have if you want to stand out from all the noise on the internet as a leader.

Limit your time on the computer.

This may seem like a strange thing to recommend when you are building an internet business, but it’s true. Life needs to be balanced, and you need to enjoy building your business. Realistically, you will spend a lot of time on your computer in the first few months because you will be learning new skills. But once you are on track, with a sales funnel in place and a marketing strategy you want to focus on, then it’s important to organize your time. Once set up, you should spend no more than tow or three hours per day on the internet. As you get better, the time you need to spend online will decrease. I have had some of my best days when I didn’t even go online at all. The reality is that you want to build a business but you are probably doing it to have a better life and more time. So get set up and streamline your business so you can enjoy your life and create the freedom you are looking for.