Family and friends: Pre-sales in the construction industry

Whenever a company has the development of a project in its plans, one of the issues that must be resolved in advance is its financing. Those who are interested in developing it may have the knowledge and skills to do so, but without enough funds, it will probably be very difficult to achieve.

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In the construction industry, development companies are the branch that generally seeks external financing to carry out their projects. From the pre-sale of the projects, they manage to obtain their financing. The Family and Friends model is a trend that was born in the United States and is currently also quite developed in Mexico, to settle in other Latin American countries.

What does the Family and Friends methodology consist of?

The concept, which in this article will be addressed specifically for construction, but which applies to all industries that work with projects that need financing, focuses on the fact that developers seek their main sources of financing among their family and friends.

Generally, obtaining investment funds for projects becomes a complicated task, since it is difficult for an unknown person to trust the company (especially if it does not have a great track record), which is why they go to the sources with which there is more relationship and those that generally, it is assumed, would trust one to provide financing.

Family and Friends is a concept that is generated from the need to obtain financing and that initially involves these close contacts but is not limited to them alone. Perhaps the developer has other close contacts who are not directly friends or relatives but who can also contribute capital and this will be valid in the same way.

The contributions of the developer's closest contacts will be the first injections of capital, so they are obtained in the early stages of the project and at the same time, they become a fundamental part of the financing.

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What are the advantages and disadvantages of this mode of financing?

The main advantages of accessing funds from Family and Friends are:

• The terms of return of the money, or compliance with delivery guidelines, are usually more flexible than with completely unrelated shareholders. This gives advantages in terms of if the project is delayed for any particular reason, the rudeness is avoided.
  
  
• Another advantage is that as they are close people, obtaining this financing becomes a simpler task, since the persuasion that must be carried out if necessary, is much simpler with people with whom you trust.
  
  
• On the other hand, as this money comes from people you know, it can be used for any other expense that arises even if it has not been specified at the time of receiving the money. Something that cannot be done if the financing comes from unknown sources, as it can lead to mistrust.

The disadvantages of these investment funds are:

• A disadvantage may come from the amount of money these people give us. Since they are our acquaintances, relatives, or friends, they may give us some support but we cannot ask for very high amounts since they probably do not have them available.
  
  
• The fact that we do not have stipulated terms for the return of the money can have negative consequences on the relationship with those who lent it to us. It is necessary to have the necessary organization to comply with returns, even if they have not been stipulated in advance, to avoid conflicts.
  
  
• Finally, we must bear in mind that when a trusted person becomes involved in our business, they may have the intention of making a change, suggesting or wanting to have more voice than we thought to give them, so it is also necessary to clarify in advance how the capital injection will work and what are the advantages of carrying it out.

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Surely you have already thought that this form of financing is the first to take into account when talking about an entrepreneur or startup, but we wanted you to know that this way of obtaining capital can also be carried out in companies with large projects that need to do so. Although it seems somewhat informal, it can be very beneficial for both parties to carry it out, as long as all the necessary conditions are specified in advance to avoid future problems.

That the investors are family and friends does not exempt the developer from complying with the deadlines or scheduled returns, the important thing is that the investment can be achieved but the formal issues that make relational issues and the proper functioning of the organization are not left aside.