6 Steps To Raise Money From Friends & Family For Your Business
Updated: Aug 14, 2019
If you have ever owned a business or thought of starting one, the one question that has probably crossed your mind is, how do I raise money to start or expand my business?
This one question sometimes stops would be entrepreneurs from pursuing their dream of becoming a business owner. However, I have discovered that raising money to start or expand a business is not as difficult as most people think it is. From my experience, the best place to start is with friends and family.
The reason is because these people love, trust, and respect you, well maybe not all of them. Nonetheless, there are people you know that would love to give you their money only if you knew how to present an appealing proposition. I have been able to raise over $100,000 on several occasions for various business projects from those within my inner circle by applying these simple steps I am going the share with you.
If you follow the same steps, the chances are you will raise enough money to start start or grow your business.
Lets dive right into to:
1. Unique Selling Proposition
This is a very important factor when it comes to raising money for your business. Unique selling proposition (USP) is basically what sets your business apart from what someone else is doing, and what guarantees that you business will be profitable.
No one wants to financially support a business that is saturated or does not have a potential market.
You must be able to prove why your business is different from others or what advantage do you have over your competitors. Introducing something completely new could also be a plus because it means you are the first to enter the market, which puts you in a position to gain enough market share. Even if others come in after you, you will be the dominating leader in the market.
2.Proof of Concept
Once you have successfully established your USP the second phase is what I call proof of concept.
This simply means, "have you tested your product or service in the market, and created some level of success?” “Did the potential target market buy what you are selling and was it profitable?” “Is there a demand for more?”
Having positive answers to these questions is a sure way to get those in your inner circle to invest in what you are doing. Ten years ago, I started a side gig that was very profitable, selling phones. However, I wasn’t just selling phones everywhere, I was selling them in Nigeria. Why? There was a huge demand.
Unlike most of the developed countries that have easy access to new and latest technologies, Africa depends on those who live in these advanced countries to supply them with phones. In those days, Blackberry was the most demanded device in Nigeria. Luckily for me, I knew exactly how to get them. I started on a small scale because I had limited capital. For several years I ran a profitable side gig without any external funds.
It then occurred to me that if I had more money I could sell more phones and make more profit. So I decided to talk to one of my friend’s about investing in my venture. I was able to prove to him how profitable it has been over the years, and with more money the profit could be a lot more.
Without overthinking, he invested $50,000 for the operation to grow. The reason why he was comfortable investing $50,000 was because I had a track record, and secondly, the market I was catering to was under tapped.
If you have an idea that you have tested and proved that it will work, I can assure you that those in your inner circle would gladly support you with their financial resources.
3. What's In It For Me (WIFIM)
Now that you have successfully passed through phase one and two, the third phase is very crucial and could determine if someone is going to give you their hard earned money for your business. No matter how good or generous a person may be, there is always a question that arises in their mind,
“What is in it for me?” In other words, when I give you this money, what do I get back in return for it?
Only a handful of people will be willing to loan you money without expecting something in return. Before asking someone for money regardless of how close they are to you, you must have a proposition for them to captivate their attention and cause them to release their money.
No matter how great your business is, if your potential investor feels like what you are offering is not worth the potential risk of them investing in your business, they will not invest.
Some people would not mind a 10% return on their money after several months, while others might consider that too low and want a return around 20 - 30%.
Generally speaking, I have always giving anywhere between 15 - 30% ROI depending on the project. You would need to evaluate the potential of your business to see what kind of return you can offer your investors and at the same time be profitable.
4. The Amount You Need For Your Business
Once you have the buy in of the investor into your business, then you can let them know exactly how much money you need. This can also be tricky because in most cases, a single person will not be able to give you all the funds that you need.
So what I typically do for all my business ventures is to give people different investment options. One with a lower investment package and the other a higher investment package.
The reason why I do this is because I am able to raise capital both from those who might not have a lot of money but still want to invest in my business and at the same time reach those with access to huge capital. This strategy has helped me to raise more money than I need in most cases.
5. Payback Period
The duration you need the money for is also a huge factor. From experience, most people are willing to loan or invest money in projects for a duration of six to twelve months. Since you are not offering a traditional investment like stocks and mutual funds, which are mostly long term investments, your payback period should not exceed twelve months.
6. Fulfill Your Promise
If you are going to gain people's trust and maintain an ongoing relationship, you must do what you say you will do. If you promise to payback by a certain period with a specific return on the capital, then do everything within your means to pay your investors back. After this initial phase they are more likely to invest in your business again because you delivered on your promise. There are instances when things will not go according to plan or the business completely fails, it happens. So what do you do in such case? Be open. Let those who entrusted you with their money know what's going on at every phase of the business, it helps to deepen the trust they have in you. If you are unable to pay them back the return you agreed on, then strive to pay them back the initial capital they gave you.
The same way your bank does not write off you debt if your business fails, that's the same way others will expect to receive their money back regardless of what happens.
I have had situations when some of my business projects failed and there was no way to payback investors from the actual business. So I had to source their initial capital from other means even though I could not pay them back with the agreed return. They understood and are still willing to do business with me in other projects today because they did not lose anything.
So when next you consider raising money for your business, do not rule out your friends and family. They are a great source to leverage when you do not have any means of raising funds through the traditional means.