There are several advantages to accepting funding from a relative. The first, and most obvious, is that by entering into a partnership to pay back this relative, there is no high rate interest to worry about, as there would be with a bank loan. Also, the relative only has to agree to the assistance, instead of applying for bank approval. There is also no risk of depreciation, as there is with the stock market. However, there is also a very large risk with this type of funding. When using a short or long term loan with a bank, once approval is granted, the funding is guaranteed. When borrowing from a relative, he/she can decide at any time to stop funding for no particular reason.
By loaning us money for our business, my relative is assuming a high risk for herself, with little real basis in the investment. It is a personal favor, and it is completely feasible that she could decide, at any time, to withdraw funding. Therefore, to ease her mind about the risks, my partners and I will offer a deferred payment plan to her from personal equity in the event the business fails. Hopefully, this will ease her mind about the investment and discourage her from withdrawing funds.
In the case of my relative withdrawing funding, however, there are other options for financing my partners and I will consider. A commercial loan is a good option, as this would not require us to turn over equity or company control. However, since the initial cash flow will be limited repaying this debt could prove to be more of a hinder than the initial loan was a help. With no operating history and little to no collateral to secure the loan, this may not even be an option.
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