Funding from mom and pop can support many businesses in the early stages of development. Called love money, this type of money is money given to an entrepreneur by the entrepreneur's family and friends to help a business in the seed or startup stage of a growing business. Love money is a type of seed money, which is money used in the research and development process necessary to get a new business running.
Usually, entrepreneurs need love money to start a business if they cannot otherwise qualify for traditional business loans like those given out at banks. Reasons for unavailable traditional loans can be insufficient credit, poor economic conditions, or a business concept that does not yet have proven results. Love money investors can also benefit from tax breaks as a result of their investment. Investments of this type made to reduce taxes for the wealthier individual can be called crown loans. Love money is usually given during the seed stage of development, which is the stage the involves research and development of the product or service, but can sometimes come in the startup stage of development when sales of the product or service begin.
Love money transactions usually occur without a defined contract specifying any interest or repayment terms, though love money is sometimes given in exchange for a percentage of ownership in the business venture. When money is given to a beginning company in exchange for the option to acquire ownership equity in the company, the family member or friend is sometimes called an angel investor. An angel investor can be any wealthy individual that invests in businesses in exchange for partial ownership. Sometimes, angel investors agree to loan money to a budding business in exchange for the option to convert the debt from the loan into company stock or part ownership in the future.
Funding received from family, friends, and acquaintances during the seed stage of a business is aptly called seed money. Seed money is different from venture capital because venture capital involves larger amounts of money and more elaborate contracts than that which is usually seen in seed money and love money transactions. Venture capitalists also tend to be people with whom the entrepreneur has little personal history.
The Internet has introduced new options for seed funding for budding entrepreneurs that can supplement or circumvent funding from family and friends. Crowd funding or crowd financing is a new method of financing in which a user accesses a group of potential investors who can each invest small amounts of money to collectively fund a business venture, usually through a website connecting investors with entrepreneurs. Sometimes, crowd financing is called crowdsource financing.
