Love Money
Candlefocus EditorLove money often comes from the business owners' immediate family, friends, and personal savings account. It can also come from extended family members, colleagues, bosses, business contacts, retirement accounts, and even crowdfunding sources such as GoFundMe and Kickstarter.
This hybrid financing source offers a number of advantages to entrepreneurs. It is often much easier to secure a small amount of love money than it is to traverse the process of acquiring venture capital (VC) funding or a loan from a bank. In addition, there are no restrictive contractual obligations, such as those associated with VCs and banks, allowing entrepreneurs to focus on their core area of expertise.
However, there are definite risks and pitfalls associated with the loving money approach. A common risk is that the larger social network of an entrepreneur can quickly become saturated with requests for funds. After all, it is much easier to approach family members and friends than to seek out professional investors. Additionally, the start-up culture famously correlates to a large number of failed companies, and love money investors are often the first to bear the financial losses. Friends and family members should also consider that their financial participation could be make them liable to creditors if the start-up fails.
It is important for entrepreneurs and investors to have a clear understanding of the risks involved before any money changes hands. Love money should only be used for legitimate investments and only with money that the investor is prepared to lose entirely. At the end of the day, love money should be viewed as a valuable capital source that can help small businesses and startups get off the ground. However, it should be approached with caution and used responsibly.