Financing a business venture, and especially a startup, is often a difficult issue. Startup founders analyze various options to help them launch an innovative company. Today, let’s focus on two solutions: family funding and self-funding. Which of these options is better? Read our article and find out.
Family funding vs. self-funding – table of contents:
- How are startups usually financed?
- Funding your startup with family and friends
- Pros and cons of family funding
- How to invest your own money wisely?
- Self-funding vs. family funding. Which is better?
How are startups usually financed?
A person planning to launch a startup can consider various sources of funding. According to the Kauffman Foundation, more than 67% of startups rely on their own savings. For 52%, bank loans and credit cards are a source of financing. 21% reach for money borrowed from family, 12% use support from business acquaintances, and 8% borrow money from close friends. Of course, startups are also financed by business angels (8%) and venture capitalists (7%)
Funding your startup with family and friends
Financial support from family when launching a new business venture seems like a sensible solution, and the fact that such an option is so popular should come as no surprise. After all, parents want to do their best for their child to succeed in life. In this way, you can raise quite a big amount of money. However, before borrowing money from family or friends, such investors should be made aware of the risks of the venture right away.
Pros and cons of family funding
Funding your startup with family and friends has both advantages and disadvantages. It is therefore necessary to analyze both, and then check which ones prevail. It depends on the situation of the business founder, as well as the financial situation of their family, the industry, and the idea. On the plus side, it is undoubtedly easy to get money. It is often enough to present your business concept without any calculations or analysis. The family does not check the business potential or creditworthiness of the young businessman, and does not demand any collateral, which is often the case with a bank.
On the other hand, if you do not pay them back the money they lent you, it can put a lot of strain on personal relationships. Therefore, you have to do everything you can to avoid losing your family’s money.This means that you should be extremely sensitive to market signals that the venture may fail, and then the only solution is to quickly withdraw from the business project.
An alternative to funding your startup with family and friends is self-financing. This is the most satisfactory and comfortable option. 67% of entrepreneurs finance their startups this way at the beginning. Such a step gives the most freedom, but also makes it easier to get more investors in the future. If they see that you have risked your own money, they are also more likely to take a risk and invest in your startup.
How to invest your own money wisely?
Self-financing your startup is often a good decision, but it must be done wisely. For starters, it’s best to separate company money from personal money, which requires setting up a separate bank account for your startup. Personal money can be used to fund the company in several ways. In the United States, one option may be the so-called startup rollover (ROBS), where you can use your retirement savings to start a business. But the easiest way is to use your savings, including those held in a savings account or investment portfolio.
Self-funding vs. family funding. Which is better?
Which option is better? Self-funding or family funding? Certainly, the first option gives you more freedom as you risk your own money. It would be certainly wiser to resign from family funding if it meant using someone’s savings accumulated over the years. On the other hand, money from the family may be a more favorable option than an expensive loan from a bank.
Read also: 7 startup roles explained.
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