Debt, Equity, Friends, & Family

There was an interesting comment made by Charlie Penner in his interview about financing innovation for small business. He said; "Equity investment, the hardest thing is evaluating the company and potential." It is a given that aspiring entrepreneurs like myself invest significant financial resources to start up a business, but if money from family and friends aren't enough, there are a variety of credit options entrepreneurs can choose from for other sources of debt capital. If you want to avoid the banks, there are different types of state and local economic development programs. Many states offer financing programs, usually in the form of loans, loan guarantees, and venture capital pools to help developing business, creating jobs and promoting economic growth.

Charlie Penner makes excellent and important points for clarifying the terms of a business agreement with your friends and family. While many people may assume that their relatives and close friends will maintain an agreement, sometimes things get ugly and relationships change, resulting in an unfortunate legal dispute. It is best to outline a contract whether it's with a family member or someone you merely have a business relationship with. This protects all parties from costly and time-consuming litigation and provides the business owners with peace of mind. Debt financing with your family seems like a preferable method of handling it so that your investor knows that they will get their money back as specified in the loan agreement and you don't have to consider their opinion in your business decisions. Equity financing can be nice if your venture is a bit more risky, but having to treat your investor as a partner if they have little knowledge of your business can be tricky to say the least. Either way it's somewhat of a risk but it helps the investor and the borrower to know exactly what the deal is and to have it on paper so that no one can change it later without warning. Some investors that trust the borrower might not even want to get a lawyer involved even if it's in their best interest, but the borrower should insist if that's the case because it simplifies the process for everyone when it comes down to being repaid. If the business is successful it may not end up being a very big deal, but failure will result in a loss for someone, and the investor has to know if he is one of those someones ahead of time. If they expect to get their money back no matter what and they turn out to have an equity investment, they will be in for a very nasty surprise.