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The Three Fs - Friends, Family and Fools, 29th May 2012 - Click for larger version The Three Fs - Friends, Family and Fools, 29th May 2012

With the continuing difficulties in obtaining finance, whether in the form of debt from the major clearing banks or equity from venture capitalists, we see many of our clients turning to the traditional fall-back sources of cash for their businesses - friends, family and fools.

On the face of it, borrowing cash or accepting an equity investment (in return for shares) from one or more of the Three Fs can have major attractions:

- There is no tricky icebreaker or exploratory discussion to ensure that the parties have a common goal and ethos;

- There is no difficult pitch to convince the sharp, experienced investor that the business plan stands up;

- The provider of funds is unlikely to have a long list of demands and conditions and the paperwork is likely to be minimal, if not non-existent.

And there’s the rub. We currently have a case in the courts, where a client of this firm (of considerable business acumen and experience) has lent a sum of money to a “connected party” and is struggling to obtain repayment.

Until the case kicked off, the our client ticked the first two of the “Three Fs” boxes - it goes without saying that this is no longer the case and the parties have fallen out irrevocably. In a nutshell, that’s the risk - if you agree to advance such funding, you stand to lose not only your cash, but the pre-existing relationship also – and the same applies to the debtor.

In the case at hand, the client in question was astute enough to ensure that matters were put in writing and in a proper legal manner by this firm – to the disgruntlement of the borrower at the time. That now appears to have been a very sensible approach.

It would be wrong to say that such form of informal lending and investment are inadvisable in every case – some of Scotland’s greatest businesses have found their genesis in a “punt” by an older, experienced friend or relative who recognises the potential of the individual and gives the business its first leg-up.

But, by the same token, the market is awash with alternatives to bank and VC financing. As a firm, we have relationships with all sorts of advisors, investors and lenders who can give impartial advice and advance appropriate funding without the complications of existing personal relationships.

We’d be delighted to point you in the right direction.

Last updated: 10.55am, Tuesday 23rd October 2012

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