Sarah's aunt and cousin have offered to provide some financial assistance for her new business. Should an entrepreneur turn to friends and family members for money to launch a company? Why or why not? If so, under what conditions?

What will be an ideal response?

During the last decade, the financial industry has been through difficult times with resulting credit crunches. Therefore, banks have tightened their lending criteria, venture capitalists have become more conservative, private investors have grown more cautious, and the issuing of public stock remains viable for only a select few businesses with good track records. Because of their relationship with the founder, friends and family are more likely to invest. Often, they are more patient and less meddlesome in the business affairs and say, "pay us back when you can." Therefore, this is an excellent source of "seed" money.

Unfortunately however, unrealistic expectations or misunderstood risks have destroyed many relationships. To avoid such problems, the entrepreneur should honestly present the investment opportunity and the nature of the risks involved to reduce the possibility of alienating friends and family members if the business fails. It is a good idea to treat financial assistance from friends and family as you would that from others — a business deal.