A financial gift from family & friends may not be all it’s wrapped up to be

At some stage of its life, your business may need to get its hands on capital, and with many people struggling to find the funding

they need from the high street banks, a common strategy is to ask family or friends for a loan. A recent survey* found that 39% of SME owners/directors use personal/family savings to fund their business, often believing that this is the best or only option really available to them.

Borrowing money from family or friends may seem like the right choice as a form of lending, as it is often viewed as a less expensive and time consuming way to raise money.  Generally family members tend to be more lenient in terms of how and when the loan is repaid and the chances are if your business hits problems they will be more understanding.  However, there are definite drawbacks that need to be considered before entering down this route.

Family members or friends who invest in your business may feel their investment entitles them to make important decisions on the running of the business.  It is vital that you agree from the outset whether the money being lent allows them shares in your company and the terms and timescales for repayment.  Avoid future conflict by ensuring they do not borrow more than they can avoid to lose should the business fail.  A simple written loan agreement prepared when the loan is made can avoid a lot of issues down the line.

Tony Seaton, Associate Director, Blue Sky Corporate Finance commented: “Borrowing money from family or friends can seem a perfect solution, especially as they are unlikely to charge you interest.  However, borrowing money in this way can place enormous strain on relationships if it all goes wrong.  I would suggest anyone looking for financial funding takes expert advice in order to explore all the opportunities available and to help identify the ones most suited to their business and personal circumstances.”

How you choose to finance your business should depend on many factors and it is best to consider all your options.  There are various alternatives to bank lending that are worth considering, such as the likes of peer-to-peer, crowd-funding lending, asset finance or local funds.  These are major growth areas in business finance, and ones that can provide businesses with potentially cheaper, more flexible loans.

For example, Business Loan Network—ThinCats.com based near Tamworth, is an online market for secured business loans operating throughout the UK which links experienced investors with established business borrowers to provide a serious alternative to high street banks.  ThinCats enables businesses to access finance in the form of a loan rather than an equity investment, and provides borrowers access to a much broader choice of lenders at competitive Interest Rates.  To date (up-to and including the end of October 2012) ThinCats has completed 70 deals providing in excess of £11m of funding.

A recent example of this was a clothing wholesaler where the bank couldn’t provide enough credit for the business to buy all the next season’s stock from the Far East, with the associated lead time involved.  Using ThinCats the company was able to obtain a £250K loan, repayable over 5 years.

Finance that is there for the longer term often stimulates and sustains the growth of a business far more successfully.  But whatever decision you make, do your best to ensure that it is a well informed one.

Blue Sky Corporate Finance offers unbiased advice and guidance on the wide range of alternative types of business finance available.

Contact our team of friendly, professional and experienced advisors for a FREE, confidential, no obligation, discussion to see how we may be able to help you.