A good business strategy begins with a capital base whose source must be clearly defined so as not to cause financial problems to the future of the business. There are many ways through which capital is sourced. Notable among them is getting money from relatives and getting bank loans.
It is important for a small business operator to recognize the pros and cons of getting money from each of the viable sources. This paper analyzes the advantages and disadvantages of getting money from an uncle to start a business, versus getting bank loans.
Money from close relatives can be charming and tricky at the same time. In this case, the uncle is willing to give me a capital of $25,000, with a lower interest rate, while the bank is offering me a loan twice the amount, but with a higher interest rate.
The obvious advantage that the money from my uncle has is the low interest rate. The interest of this money is not compounded, which also contributes to the lower interest rate (Balle 2011). The other advantage this money has over a bank loan is that it does not require a complex transaction.
Thus, there are no worries on long term loan application and approval. In addition, money from a relative does not come with strict repayment deadlines. Therefore, if my uncle gave me the money, he may be more lenient in dealing with my repayment record, even when the deal goes sour (Alterowitz & Zonderman, 2007). There are also no limitations on the use of the money borrowed from the uncle.
On the other hand, capital sourced from an uncle does not offer credit reporting services like other major sources of finance such as bank loans. The uncle will not report my payment history to any financial institution such as a credit bureau.
This means that I cannot boost my credit score through timely repayment since there are simply no records. Another disadvantage is related with my reputation and that of my business. A situation may arise where I may not be able to repay the loan to my uncle. This will lead to mistrust and conflict can also arise between my family and my uncle’s family (Balle 2011).
Similarly, sourcing capital from bank loans also comes with its pros and cons. The first obvious advantage is the bigger amount of money that the bank has to offer. This can give me an opportunity to expand the business beyond my expectations. Through the bank loan, I can boost my credit reporting since the process of repayment is recorded. The bank can also monitor the operations of the business and offer other services such as management services to ensure the proper behavior of the business (Stern & Chew 2003).
Also, although the interest rates are much higher than that of the capital sourced from my uncle, they are still much less relative to long term interest rates (Brigham & Daves 2010). Bank loans also have their disadvantages in that, they have high repayment penalties.
Bank loans have stipulations on how the money should be used thereby giving one less freedom on how to use the money. Also, the large amount of money the bank offers can lead to a decrease in cash flow in my business. This is because the repayments might even overtake the income.
A good business strategy begins with a capital base whose source must be clearly defined so as not to cause financial problems to the future of the business. The source of the capital should not have adverse effects to the business when it is not performing well. Basing on the analysis of the pros and cons of the sources of capital, I would go for the personal loan from my uncle. This is mainly because there is more financial freedom of the capital from my uncle than a bank loan.
Alterowitz, R., & Zonderman, J. (2007). Financing your business. Entrepreneur Media Inc., Canada.
Balle, J. (2011). Advantages and disadvantages of borrowing money from family. Retrieved April 22, 2011, from
Brigham, E. & Daves, P. (2010). Intermediate financial management. Mason, OH: South Western Cengage Learning,
Stern, J., & Chew, D. (2003). The revolution in corporate finance. Malden: Blackwell Publishing Ltd.