Love money is the name given to the capital contributed by your loved ones.
Involving those around you can be a good solution to get some of the capital you need to start your project.
It is also a method of investment that can be fiscally advantageous for them because of the aid mechanisms put in place by the State.
Advantages And Disadvantages Of Love Money
Convince those close to them – also known as the 3Cs – the Cousins, the Buddies, and the Crazy! – is often easier than knocking on the door of strangers (bank, business angels).
In addition, they are generally much faster to make an investment decision and less demanding in terms of documents to provide. A good business plan is generally sufficient, whereas calling on business angels will require producing a whole series of documents allowing them to carry out their due diligence.
Limited amounts invested
This is the major drawback of love money: the amounts invested by relatives are generally limited to a few hundred or a few thousand euros per person.
This method of financing can therefore be a good solution to finance a project requiring a low investment or to find additional capital.
Relationship sometimes difficult to manage
It is important from the outset to clearly define the rules of the game, namely: their money will be invested in a high risk project – the success rate of business start-ups is low – and they may therefore not see it again; and their role is a financial investor role – you don’t want to end up with an overly clingy cousin getting involved in the day-to-day running of the business.
Here are 2 tips:
- Only approach people who can afford to lose the sums involved
- Clearly define the framework of the relationship in the shareholders’ agreement
If you are also looking for financing from external partners (bank, professional investors), succeeding in obtaining an investment from your relatives constitutes a positive signal.
The idea here is very simple: if you have managed to convince those who know you best to entrust you with their hard-earned money, it is because your loved ones consider you honest (you are not going to run away with their money) , and able to carry out your entrepreneurial project; which is rather reassuring for someone who does not know you.