Imagine you own a small business which is in need of finance. What are the advantages and disadvantages of a) raising money from banks, b) asking family members to contribute, and c) tightening your belt for a while to save some money? Compare and contrast the three approaches (at least 150 words each)

A) When you take out a bank loan, you have complete control over what you do with the money. Unlike other forms of loans and financing, the bank does not assume any sort of ownership or influence in the way you run your business. Nevertheless, paying back the loan also is your responsibility, and failure to do so can result in the bank foreclosing on your business. This is different from equity financing, for example, through which investors take part ownership of your business. In that situation, you are not personally liable if they want to cash out, and it's up to them to find a buyer.

Bank loans offer you access to a wide array of terms, fees, application requirements and interest rates. These variables often differ from bank to bank, and usually can be negotiated and adjusted; you can shop around for the loan terms that best suit you and work with the bank to make the deal as sweet as possible. An issue to keep in mind is that interest rates can rise, making a loan unpalatable or very difficult to pay back. In some cases, interest rates and other terms can change during the repayment period, making the success of your business subject to alterations in the bank's demands.

Banks normally require a lengthy and thorough application process before they will approve you or your business for a loan. Especially in the case of small businesses, which often fail, banks want many details about your business plan before they are confident about loaning you money. This can be a hassle and an obstacle to funding. However, a strong application with a solid business plan and good referrals can make you look very appealing to the bank and win you favorable terms for the repayment of the loan. The application process might even prompt you to address important facets of your business that you hadn't considered previously.

Credit

Credit history is a crucial determining factor for getting a bank loan. Poor credit can pose an obstacle against favorable loan terms or even for securing a loan at all. This is not an issue for other types of funding, such as stock offerings. However, good credit can result in a much higher chance of approval for a loan and favorable terms of repayment. Credit ratings can be repaired and bolstered before approaching a bank for a loan. Even for people with substandard credit, bank loans can be beneficial. Although the terms might be harsh at first, successful repayment of bank loans can be used to build up your credit, making you a more appealing candidate for loans in the future.

B)

Full Disclosure

It might seem natural to approach your family about borrowing money if you have a "normal" reason, such as buying a car, starting a business or catching up on your student loans. If you have reasons that aren’t so easily explained, or that you prefer not to disclose, it could get a little tricky. Your family will surely ask you why you need to borrow money, and you’ll be forced to either lie to your family or tell some uncomfortable truths.

Justifying Your Actions

Say you borrow $500 from your mom or dad because your car broke down and you couldn’t afford the repairs. You’re bailed out because you got your car fixed, but now you have to explain yourself every time you go out with your friends. Your parents will want to know why you’re spending money on leisure activities instead of paying them back or putting more into savings so you won't find yourself needing an emergency loan again. These questions aren’t unreasonable, but they could get old after a while.

Conflicts

Easily the worst case scenario that could occur when borrowing money is if you’re unable to pay back what you borrowed. This could create a serious rift within your family, one that could involve many people and one that could be very difficult to repair. These problems also could arise if you’re late in paying back an installment, if you turn to them for loans on a regular basis, or if you appear to be ungrateful for receiving the loan.

Avoiding Problems

Sometimes borrowing from your family is a necessary evil, especially if you don’t have any credit history. Your best bet is to be as honest as possible with your family. Explain exactly how much you need and why you need it, and provide a rough timeframe of when they can expect their money back. If things go wrong with your repayment plan, honest communication is the best policy. Your family will be a lot more understanding if they know what’s going on than they would be if you just stopped paying them back with no explanation.