More business owners using personal finances to invest

28/02/2017

As we all know, the struggle to save and purchase property in Britain for young people has led to many families offering to lend the funds to their children to help them onto the property ladder.

Recent research has shown over £5bn was lent in 2016 to their children by the bank of mum and dad, but it looks like these handouts are also extending to young entrepreneurs who are unable to secure a bank loan to start their businesses.

Fresh findings from Opus Energy have revealed one in four small businesses with a turnover of less than £250,000 have used personal funds, including the bank of friends and family, to invest into their business. This contrasts with bigger businesses with a turnover of £2-3 million, who are largely avoiding this route altogether.

Bank of me

Personal finances, i.e. money saved, inherited or gifted from the family ‘bank’ is becoming a popular choice when faced with the challenges of applying for a bank loan with little credit history, turnover and financial history. According to the research, lenders reject an average of 100,000 small business loan applications each year, which contributes to a deficit of around £4bn per year.

Unattractive rates push borrowers away further – with stiff conditions and hefty re-payments hampering the future of their small business – making owners feel as though they have little choice but to borrow from the personal kitty. But is that really the case?

More suitable options

Under the new bank referral scheme, businesses turned away from banks are given the option to be referred to different methods of finance, such as invoice finance, peer-to peer lending and crowdfunding.

The invoice finance industry recently enjoyed a record quarter, with lending to businesses soaring above £20 billion. Meanwhile, crowdfunding websites have seen at least £7.2 billion has been lent over the web, and climbing, helping to fill the void in the current lending gap.

Research from Thincats, a peer-to-peer lending website, has also found that nearly 1.6 million people in the UK have borrowed money from their savings or family and friends to invest in their business.

Furthermore, according to Thincats, start-ups are borrowing an average of £4,479 from friends and family, in around 1.6 million cases in the UK. Bypassing the banks altogether seems to be commonplace for start-ups now, due to the limited success rates and availability of funds after the financial crisis of 2008.

So, with friends and family becoming a popular choice – do many start-ups consider the ramifications of that investment later down the line?

Things to consider

When considering borrowing money from personal finances or friends and family, it’s important to remember to protect yourself and your business in the future. If you are currently considering this, here are 6 tips to avoid potential conflict:

• Decide who you would like to borrow from, a larger group or a sole source?
• Always be clear on what the money is being spent on and be prepared to explain in detail your plans for the business.
• Provide a written business plan – read our top tips for writing a solid business plan here.
• Be clear on the terms of the borrowing. Here, it’s a good idea to draw something up in writing that both parties can take a copy. Include the nature of the loan, and when the money is expected to be paid back.
• If you are investing money from your own personal savings, be clear on how much and, if possible, retain a safety net for unexpected circumstances that could start to affect your personal life.
• Look at the bigger picture. It’s no longer a straight choice between a loan or overdraft and borrowing from savings or friends and family – there is a raft of innovative funding options available to businesses of all sizes nowadays. The secret is knowing where to look.

Although an inability to successfully obtain a loan from a bank could be seen as a barrier to entry for many start-ups, it is important to note that the greater flexibility of the small business finance market is enabling many to source and adapt to alternative methods of finance – producing innovative and resourceful business unafraid of change and ready for success.

Have you borrowed money from family or friends, or used your own finances to invest in your business? We’d love to hear from you. You can leave a comment in the box below.