Aspiring entrepreneurs will need to invest significant financial resources of their own when they start their ventures. Friends and family can be a good source of funds. Care must be taken to specify the form of financing (debt or equity) and the terms under which it is supplied.
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The Small Business & Technology Development Center (SBTDC) helps small to medium sized businesses in Michigan. Often, it is one of the first places prospective business owners come when they consider starting a new venture. As a result, Charlie Penner, Regional Director of the SBTDC, has a lot of experience helping new business owners figure out how to finance their enterprises. Charlie notes the following:
- Entrepreneurs should expect to make a significant personal financial investment in their firms. Others won't risk money if they won't.
- The fundamental divide in finance is between debt and equity. Simply stated, debt has to be repaid and is usually tied to hard assets that can be repossessed if the business fails. Equity implies and ownership stake in the business and a sharing of business risk.
- Many entrepreneurs use "friends and family" financing. A few things are important here:
- Agreements should be formal stating terms of repayment if it is debt financing or ownership stake if equity financing.
- Given the formal nature of the agreements, it pays to have an attorney involved.
- Virgin Money is a good resource for all things that should be considered in this type of financing.
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