What is Love Money
Love money is capital extended by family and/or friends to an entrepreneur to start a business venture. The decision to lend money and the terms of the agreement are usually based on the relationship between the two parties, instead of a formulaic risk analysis.
BREAKING DOWN Love Money
Love money is usually given to entrepreneurs by family or friends when there are no other financial options available to start a new business or when an injection of capital is required. That means the entrepreneur does not meet the criteria necessary to get credit and/or capital from traditional avenues like banks or other lenders.
Love money typically has no fixed repayment terms, and can sometimes be given for equity in the venture. But most of the time, love money is advanced as a loan to the entrepreneur.
Angel Investors and Love Money
The people who advance love money are often called angel investors. These investors will often inject cash into a new venture or when a business needs capital to continue its operations, especially during the difficult early stages. According to Forbes, angel investors gave between $24.1 billion and $24.8 billion per year during the period of 2013 through 2015.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels.
Why Is Love Money Important?
Love money is crucial to many types of business ventures, especially (small) startups. Many of these businesses would never obtain financing through traditional means. For many budding entrepreneurs, love money is the best way to get off the ground.
But love money is not always for first-time entrepreneurs. It can also be a great source of capital for people who are already established but cannot find enough ways to finance a new venture.
Does Love Money Mean Less Stress?
While it may seem easier to approach people you know for capital, that does not necessarily mean it comes without stress and pressure. In fact, there may be an additional sense of responsibility toward your funders. It is not always easy to mix business with pleasure, so discussing the direction of the business or when (and how) you will repay the debt can be difficult.
Both parties should set out clear guidelines and expectations from the beginning in order to help alleviate the pressure and any future problems. Make sure both sides are aware of any legal consequences and considerations before any capital exchanges hands. And just like any other investor, the funder should be aware of market conditions and the risks associated with investing in the business.
Example of Love Money
Jeff Booth, co-founder of BuildDirect, used love money to help his startup. The company, based in Vancouver, Canada, is an online marketplace for home improvement products. Family and friends helped finance his company when it was getting off the ground, at a time when traditional funding was not an option. According to Booth, he and partner Rob Banks managed to raise $500,000 from their investors. Booth said they were clear to their friends and family about the possibility of the startup failing and set clear expectations of how they would repay the loans.