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Like all small businesses, there will likely come a time in a family-run enterprise when an injection of cash is needed to fund growth.
If there isn’t the capital in the business, or you don’t want to have it tied up in new services, products or buildings, you might be considering external finance. There are of course many possible means by which you might do this, but the approach taken can be very different for a family business.
In all likelihood, you’ll be thinking about things like retaining management and control, protecting working capital and the impact your financial decisions have on future generations.
This could be further complicated by the aims and objectives of different members of the family involved in the business. Hopefully, you’ve been reading our recent blogs which will help ensure you are all on the same page where the family business vision and strategy is concerned.
Knowing and understanding your vision will impact how you go about securing the funding and resources you need for growth, as you will have to weigh the finance options against the family business objectives.
That being said, here are some of the potential routes you might do down to fund growth for your family business.
‘Traditional’ borrowing
Borrowing from a bank or alternative finance provider is one of the most common sources of external finance. There’s so much available, such as traditional loans, short term loans, asset finance, invoice finance and commercial mortgages, that it’s likely you will find something to meet your needs. Obviously, there is also the consideration of having to factor monthly loan repayments into your cashflow and the potential long-term financial commitment, depending on how much you want to borrow.
The bank of family and friends
As a family business, you might prefer to turn to family and friends first in your search for funding. This could be an easier and more palatable method of getting what is needed while maintaining control. Hopefully the application process won’t be as robust as with a traditional lender and the terms should be more favourable! Do make sure you get the agreement in writing though because as we have discussed in previous blogs, family relationships can quickly turn sour. It’s not worth entering into anything that you think will cause issues or problems in the family.
Equity Financing
Another option for raising capital is to invite investors to inject cash in return for a stake in the business, rather than a straight forward loan of the money. This could be private equity firms, venture capitalists, or angel investors – who could be someone you know, and indeed another family member or friend.
Obviously, this represents a much greater commitment than traditional borrowing as you will be giving up shares in the company which might be destined for other family members or generations in the future.
It also puts management and decision-making powers in the frame, which is something you may be reluctant to give up. Depending on how attractive a prospect you represent, you might be able to negotiate the voting and equity rights of new shareholders. Perhaps they are happy to take on a more silent role, for example. On the other hand, taking on an investor might represent a fantastic opportunity for your business. It could be that bringing someone else into the business in this way is critical to its success, depending on their knowledge and expertise.
The main points to consider are weighing up the needs of the business now and in the future against the funding options on offer, which should help you decide the best course of action.
