Borrowing money from friends and family to finance a new business is a terrific idea -- in theory. Banks and other lenders will demand airtight business plans and financial statements. Your grandma Edna might demand a hug. But be aware of the potential drawbacks of so-called "easy" money.
First of all, if you ask family and friends for money, make sure it's a loan, not an equity investment. If you allow too many friends and family to own a legal stake in your business, then you're setting yourself up for trouble. Legally, you'll have to run every major business decision by them first. And if you don't consider their opinion, they can sue. Talk about an awkward family reunion.
That said, private loans can offer significant advantages over traditional loans. Interest rates -- if interest is even charged -- are generally much lower than those offered by banks. Private loans are also an important show of support (both financial and emotional) in the early stages of a new business [source: Advani].
One crucial rule: Get everything in writing. It will make both sides feel more secure about the transaction and rule out any potential legal problems down the road. You can find free boilerplate loan documents online.