Funding Mistakes To Avoid
5th September 2019 Dominic Buch, Managing Partner, Caple
A good insight into how family businesses can avoid the three biggest mistakes when seeking funding.
More than two thirds of all UK businesses are family owned, according to the Institute for Family Business. These firms generate a quarter of UK GDP and employ around 13 million people. To continue their success, they need access to funding. But, for family business owners, securing finance is often a complex task.
Faced with a plethora of options and often little direct experience, it is easy for owners to make mistakes.
However, with the right advice and support, family businesses can avoid the most-costly mistakes and access the finance that best suits their firm.
What are the three biggest mistakes and how can family business owners avoid them?
One, trying to go it alone
From banks to specialist debt funds and alternative financiers, family businesses can be confronted with a confusing range of providers when looking for capital.
In such a situation, it has never been more important for the family to seek the advice and support of an accountant or business advisor.
An accountant or advisor will help clarify what the firm is trying to achieve and the purpose of the funding.
With this understanding, the advisor will be able to assess potential sources of capital, as well as the cost and suitability of that capital for the business.
Business advisors are also well placed to take account of an owner managers appetite to risk and their approach to lending. For instance, many family business directors do not want to agree to onerous personal guarantees that many high street lenders now require.
Once the accountant has recommended an appropriate source of finance, they can then help develop the business plans and forecasts that make the case for funding.
Often accountants and advisors make the difference between a family business accessing funds and not.
Two, seeking funding from just one provider
Some family business owners may think that they should access all their finance from just one funder. But it does not always make sense to borrow from only one provider.
Different types of finance are suited to different purposes. For instance, working capital, replacing old equipment and funding growth are very different activities.
It would not always make sense to use just one form of finance to cover all of them.
Using just one service is inefficient. It fails to make the most of business’s assets and capital and does not always help the business meet its financial goals. It is also often more expensive.
Instead, a business might use lower cost receivables or invoice financing from one provider to cover working capital requirements. It might then use complementary unsecured lending from another provider to fund growth.
Blending financing in this way reduces the overall cost while enhancing long-term growth potential.
Three, giving away ownership and control when you don’t have to
Growing family businesses often need between £500,000 and £5m in funding for their next phase of growth.
Too often the lack of additional assets to offer to lenders as security prevents family businesses from raising further bank financing to develop their business.
While banks can fund an amount that reflects the assets in a business, they can’t help if a business has no further assets to put up as security.
Unable to access additional secured funding, family business owners are often obliged to agree to personal guarantees or to consider giving up equity to raise funds.
We call this the “equity dilemma” and too many family business owners face it.
They must consider the difficult choice of scaling back their plans or agreeing to personal guarantees or diluting their ownership to fund growth which is often a critical barrier to growth among family businesses.
Most importantly, using unsecured lending means the family retains ownership and control of their business. When family businesses are such an important part of our economy, we need to help them secure the finance they need to grow.
And we need to do this without pushing them towards diluting equity and losing control.
About the Author - Dominic is one of the Founders and the Managing Partner of Caple, an organisation that helps with providing unsecured finance of between £500,000 and £5m based on the future cash flows of the business. Find out more at www.caple.eu/en