Advantages and disadvantages of friends and family finance

Friends and family finance is capital from people you already know, given as a gift, which does not need to be repaid, or a loan, which does. It is an external source of capital.

Advantages

• Flexible repayment terms. You and your supporter can agree the schedule between you, so repayments can start small or pause until sales are steady — helpful when the enterprise's income is uneven.
• Free or low cost. A gift carries no interest or fees, so all the money goes into the enterprise. A loan from a relative may be interest-free or charged at a very low rate.
• Lower interest than a formal lender. The rate charged may be lower than a bank's, and because the arrangement is informal it may not affect your credit score.

Disadvantages

• Lack of clarity. With nothing written down, people remember the deal differently, which causes awkwardness and arguments if something goes wrong.
• The supporter may ask for the money back. They might need it early, perhaps to cover their own bills. If it has already been spent on stock or equipment, the enterprise is left short of cash and the relationship is strained.
• A sense of entitlement. Having provided the money, the supporter may expect a say in decisions, such as which supplier to use, which can pull you away from your own plan.
• A limited amount. Friends and family have their own commitments, so the sum available may be small and may not cover everything the enterprise needs.

For example, a learner starting a weekend bike repair service needs £420 for tools and a repair stand. An aunt lends £300 interest-free, repaid at £40 a month once repairs begin: cheap and flexible. But she also expects to decide which jobs he takes on, and asks for £100 back early when her car needs fixing — leaving too little for the stand and straining both the enterprise and the relationship.