Friends and family finance

Friends and family finance is capital given to an enterprise by people the owner already knows, such as a parent, a grandparent or a close friend. The money comes from outside the enterprise, so it is an external source of capital, even though the arrangement is usually informal.

Gift or loan?

Supporters can hand money over in one of two forms, and the difference matters:

• A gift is money given to the owner. It does not have to be repaid and normally involves no interest or fees.
• A loan must be repaid and may involve interest, even when the arrangement is informal and nothing is written down.

For example, Sam runs a weekend business printing custom phone cases to sell at craft markets. His sister gives him £120 as a gift towards blank cases and ink, while his godmother lends him £250 for a market pitch and a display stand, to be repaid at £25 a month. The £120 is Sam's to keep, so nothing comes out of his takings, but the £250 is a debt he must budget for every month — even one where he sells very little.

Why it can be quick

Friends and family can be a fast source of finance because the owner asks people they already know and may get an answer the same day. There may be little formal paperwork — perhaps no application form, credit checks or security — so it can be quicker and simpler than a bank loan. Even so, writing down the amount, the repayment date and any interest is sensible, so both sides remember the same terms later.