Understanding Love Money: Seed Funding from Friends and Family

What Is Love Money?

Love money refers to seed capital that's extended by family 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. It can make all the difference for those who lack access to traditional funding sources, but it can potentially stress those personal relationships.

The concept is akin to angel investors, any accredited investors who can afford to put money into a risky venture, but love money is received from friends and family.

Exploring the Role of Love Money in Startup Financing

Love money is usually given to entrepreneurs by family or friends when there are no other financial options available. Love money may be the only financing option for an entrepreneur who does not meet the criteria necessary to get credit or capital from traditional avenues like banks or other lenders. Love money may be used to start a new business or to provide an injection of capital to an existing business when required.

Love money typically has no fixed repayment terms, and can sometimes be given for equity in the venture. Love money may also be advanced as a loan or a convertible note with a more formal and structured agreement. Regardless of the structure, it is recommended that investors only use risk capital—money they are prepared to lose—when providing love money investments to family and friends.

Comparing Angel Investors and Love Money

The people who advance love money may also be considered angel investors, but that is not always the case. The term angel investors may refer to any high net worth individual who can afford to put money in a risky venture, but it usually refers to accredited 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, but they tend to have an expectation of returns and a set exit strategy. To qualify as love money, the angel investor would have to be in the entrepreneur's social network prior to investing.

The Importance of Love Money for Entrepreneurs

Love money is crucial to many types of business ventures but is especially helpful for 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.

That said, 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 secure enough financing. The more advanced a business is, the more formal a love money investment is likely to be. 

Balancing Stress and Benefits of Love Money

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 when you know them personally. It is not always easy to mix business with pleasure, so discussing the direction of the business and when (and how) you will repay the debt can be difficult.

Both parties in a love money transaction 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 changes hands. More importantly, just like any other investor, the funder should be aware of market conditions and the risks associated with investing in the business. 

The Bottom Line

Love money is seed capital provided by friends and family to entrepreneurs, typically when traditional financing sources are unavailable. It's crucial for startups that may not meet the criteria for conventional loans or investments.

Both parties must understand the full risks. Love money should be considered risk capital. It's similar to that provided by angel investors but love money investors are usually within the entrepreneur's personal network. They may not have the same professional expectations. It's essential to have clear guidelines and expectations to reduce potential stress.