Like HowStuffWorks on Facebook!

How Start-up Capital Works

Borrowing from Friends and Family

Before you use up all of your personal savings on advertising your business (which wouldn't take long with today's advertising costs), think about your other options. Have you asked Mom and Dad for a loan? Does Grandma have a few thousand dollars that she might like to invest? Has that college roommate really been as successful as he said he was at the last reunion? Tapping into the pockets of friends and family has some benefits, but it also has some drawbacks.

For one, you have to ask them for the money.

If you do end up asking friends and family, make sure you present the business to them just like you would pitch it to a venture capitalist (VC). Let them decide whether they want to take the risk (remember, they know you). Make sure you have a written agreement or promissory note that specifies the details of the loan. And don't get upset when they pester you with questions about how their money is doing. This would be another drawback of tapping into this particular money source: constant contact.

Overall, borrowing from friends or family is probably not your best choice, simply because of the strain it may put on relationships. However, it does work for many people and may even strengthen your relationship if your business takes off and is successful.