Citations (3)



Financing from Family and Friends

Samuel Lee

New York University (NYU) - Leonard N. Stern School of Business; European Corporate Governance Institute (ECGI)

Petra Persson

Stanford University; Research Institute of Industrial Economics (IFN)

May 1, 2013

NYU Stern Working Paper FIN-12-007
IFN Working Paper No. 933
ECGI - Finance Working Paper No. 358

Informal finance is often believed to be expensive and in limited supply. But most informal investors -- family and friends -- offer funds cheaply; and yet, borrowers seem to prefer formal finance. We explain this in a model of external finance that assumes social preferences between family and friends. Social preferences make informal finance cheap, but amplify the entrepreneur's aversion to failure, dissuading risk taking and stifling investment demand. Even counterparties with social ties can therefore benefit from formal contracts. This is pertinent to the limited success of group-based microfinance in generating entrepreneurial growth, and to the emergence of social lending intermediaries.

Number of Pages in PDF File: 57

Keywords: Informal finance, family loans, peer-to-peer lending, small business lending, entrepreneurial finance, microfinance, missing middle, financing gap, risk capital, social ties, altruism, social collateral

JEL Classification: G32, G21, O16, O17, D19, D64

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Date posted: June 19, 2012 ; Last revised: January 9, 2015

Suggested Citation

Lee, Samuel and Persson, Petra, Financing from Family and Friends (May 1, 2013). IFN Working Paper No. 933; NYU Stern Working Paper FIN-12-007; IFN Working Paper No. 933; ECGI - Finance Working Paper No. 358. Available at SSRN: http://ssrn.com/abstract=2086625 or http://dx.doi.org/10.2139/ssrn.2086625

Contact Information

Samuel Lee (Contact Author)
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Petra Persson
Stanford University ( email )
Stanford, CA 94305
United States
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
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