News

November 09, 2010

More business owners turn to family and friends for finance

Small-business owners are increasingly turning to friends and family for funding as they struggle to obtain bank finance, research from the Association of Chartered Certified Accountants (ACCA) has found.

The ACCA survey of 380 small firms between July and September 2010, found 21 per cent asked friends, family and other business directors for help with finance – with 94 per cent of those succeeding. This was the most popular form of finance after bank overdrafts and credit from suppliers.

ACCA senior policy adviser, Manos Schizas, said that most business owners don’t plan to rely on family and friends for funding, but it can become a necessity. “If they can’t get an overdraft it is likely they will turn to family financing as it is much less dependent on a business’ cash position,” he said.

However, he added that asking family and friends to invest in the firm carries a risk. “This type of funding can present problems with running the business,” said Schizas. “You may get more decision-makers within the firm and you will need to manage how family life interacts with company life – some businesses may not be ready for this.

“Business owners must be clear on what the business is meant to achieve, its objectives and strategy before handing over an equity stake in the firm,” he added.

Forum of Private Business (FPB) spokesman, Chris Gorman, warned that finance from family and friends should only be used as a last resort. “They must be careful as there is no guarantee that the business will be a success,” he said. “There are other forms of finance that firms should consider before going to their family or friends, bearing in mind the potential for conflict.

“If firms are struggling to get traditional finance, they can consider a number of other options such as private investors and lenders – for example, they can join the lender-borrower matching website Funding Circle for free to get low-interest loans from other small businesses,” he added.

Financing your business

• Financing your business