According to the Global Entrepreneurship Monitor, which is a joint research effort by Babson College and the London Business School, millions of businesses are financed each year with money from friends and family, while only a few thousand obtain funds from professional investors. In fact, in the United States, from 2000 to 2003, 5 percent of the adult population invested privately in some else’s business. The investment went to close family members (41.8 percent), friends and neighbors (28.5 percent), other relatives (10.5 percent), strangers (9.4 percent), work colleagues (6.1 percent), and other (3.6 percent).^[2] Besides offering loans, friends and family often help out new business owners with gifts, forgone or delayed compensation (if a friend or family member works for the new business), or reduced or free rent. For example, Cisco Systems, the giant producer of Internet-related gear, started out in the house of one of its cofounder’s parents.

There are three rules of thumb that you should follow when asking friends and family members for start-up funds. First, you should present your request in a businesslike manner, just like you would to a banker or investor. Describe the potential of the business along with the risks involved. Second, if the help you receive is in the form of a loan, a promissory note should be prepared, with a repayment schedule, and the note should be signed by both parties. Stipulating the terms of the loan in writing reduces the potential of a misunderstanding and protects both you and the friend or family member providing the funding. Third, you should be careful to ask only people for help who are in a legitimate position to offer assistance. It’s not a good idea to ask certain friends or family members, regardless of how much they may have expressed a willingness to help, for assistance if losing the money would cripple them financially. Remember, there are risks involved with any new business. If you’re unable to repay a loan to a friend or family member, you risk not only damaging your business relationship with them but your personal relationship as well.

You should be careful to ask only people for help who are in a legitimate position to offer assistance.

Bootstrapping is finding ways to raise start-up funds without the need for external funds through creativity, ingenuity, thriftiness, or any means necessary.^[3] (The term comes from the adage “pull yourself up by the bootstraps.”) It is the term attached to the general philosophy of minimizing start-up expenses by aggressively pursuing costs-cutting techniques and money-saving tactics, as discussed in Truth 21, “How to think about money as it relates to business.” There are many well-known examples of business owners who bootstrapped to get their companies started. Legend has it that Steve Jobs and partner Steve Wozniak sold a Volkswagen van and a Hewlett-Packard programmable calculator to raise $1,350, which was the initial seed capital for Apple, Inc.

While bootstrapping is highly recommended in almost all start-up situations, there are subtle downsides. Cost-cutting and saving money are admirable practices, but if you push these practices too far, you can hold a business back from reaching its full potential. In addition, business owners who bootstrap by working out of their homes rather than renting office space are often lonely. The price of renting space in an office building or strip mall where there are other businesses present may be worth it if it provides a business owner access to a network of people who can be relied on to provide social support and business advice.