Alternative Finance Options for Family Businesses
11th July 2019
In 2017, family businesses generated £1.7 trillion in revenue, and contributed £598 billion to the UK GDP in 2017, according to a recent report by the Institute for Family Business. Despite this, many small businesses are rejected by traditional lenders when trying to access vital funding for growth. If you run a family business and need a boost of working capital to keep things ticking over, here’s a quick look at some of the alternative finance products currently available to family businesses within the UK.
Most family businesses will have some initial investment from angel investors or friends and family in exchange for a share of the business, but this can be taken one step further through crowdfunding.
Crowdfunding involves several individuals contributing a small amount of money towards an overall funding target. Campaigns can be set up on sites such as Kickstarter or GoFundMe, and the most successful ones will be preceded by a solid marketing and PR campaign to create a buzz and drive engagement.
You can either opt for rewards-based crowdfunding, in which contributors get a reward or product in exchange for financial support, or equity crowdfunding, where the contributor receives a share of the business in exchange for funds. Either way, it’s worth noting that if you don’t hit your crowdfunding target within the allotted time then the amount raised is returned to the investors. It’s therefore crucial to be realistic about your crowdfunding goal when setting up your campaign.
Overall, crowdfunding is a viable option for family businesses with a strong understanding of PR and marketing who are still in the early stages of growth, or who are looking for an injection of capital to launch a new product or service.
Peer-to-Peer Lending (P2P)
As with crowdfunding, P2P lending also involves a small business seeking funding from several investors. The crucial difference is that with P2P, investors lend the money to businesses as opposed to investing it in exchange for shares or rewards. This means that investors charge interest and expect the money to be repaid in full, just as with a traditional bank loan. P2P lending is therefore sometimes referred to as ‘debt crowdfunding’.
Family businesses seeking funding will use an online P2P platform to pitch their loan auction, covering information such as why the funds are needed, how they’ll be used, and the business’ financial history. Each business will usually also be assigned a risk category depending on the financial health of the business so that lenders can gauge the risk level of any potential investments.
Potential lenders can browse this information and decide which businesses they’d like to invest in, how much they’d like to invest, and the interest rates they’re asking for. Small businesses can then accept the offers that work from them. The small business will then make fixed repayments, including interest, to the investors.
As all money is lent directly between businesses and managed through an online platform, P2P lending does bring a similar sense of community as crowdfunding. As such, it’s a popular option with family businesses who are looking for a boost of working capital in the form of debt financing without going to the main banks.
P2P is also a viable option for family businesses who are still getting up and running and who may find themselves turned away from traditional lenders on account of a thin file or poor cash flow history. As P2P loans tend to be lower in value than what’s offered by the big banks, they’re generally more suitable for family businesses who need a top up or boost of working capital as opposed to a large sum of investment.
Invoice finance is a way for businesses to borrow money against yet unpaid invoices. It’s considered to be an effective way to free up cash flow if you frequently find yourself out of pocket due to long payment terms. Invoice financing is also one of the fastest ways to access working capital, as most lenders will provide businesses with funds within 24 hours of receiving an invoice.
There are two main types of invoice finance; invoice factoring involves customers settling the invoice directly with the invoice finance provider, whilst invoice discounting means the customer pays the small business directly. Invoice factoring companies will therefore involve the customer being aware of the arrangement, and the factoring company will chase late payments on your behalf.
There are pros and cons to both, but the main consideration is whether you want the invoice finance provider to manage the whole process for you, or if you’d rather the customer were unaware and still dealing with you directly. Either way, the invoice financing company will usually send you around 90% of the value of the invoice upon receipt, with the remaining 10%, minus fees, paid to you once the customer has fulfilled the invoice themselves.
As you may expect, invoice financing is a popular option for family businesses who may find themselves out of pocket for several weeks due to long lead times and payment terms, such as those within the manufacturing or construction industry.
Unsecured business loans
Unsecured business loans are a popular source of short-term finance for family businesses due to the flexibility they offer. Unlike secured loans, which require the business owner to put up a property as collateral against the loan, unsecured loans only require a personal guarantee. Overall, they’re a good option for small business owners who need a quick boost of capital, as many alternative finance lenders can send businesses the funds within a couple of days of application.
However, due to their unsecured nature, unsecured business loans do come with higher interest rates and shorter lending terms than their secured counterparts. Due to the fact that there’s no collateral to offset the loan against, businesses need to demonstrate that they have a good credit score and repayment history.
As a result, unsecured business loans are a good option for any family business that needs access to funding fast or that is looking for flexible terms that can be tailored to their unique business needs. In particular, if a family business requires a form of finance that’s tailored to a specific time-sensitive need, such as to purchase discounted stock from a competitor, an unsecured business loan can provide a speedy solution, as outlined in this case study featuring family business PreLoved Kilo.
There are also a range of other sources of funding available to family businesses, such as merchant cash advances, asset finance, trade finance and the revenue advance. If you want to understand more about the alternative finance market and how it could benefit your family business, take a look at this guide to alternative finance.
Jyoti Patel is a content manager at Fleximize. Fleximize is a UK-based alternative business lender dedicated to providing its customers with the support they need to grow and thrive. Its range of business finance includes unsecured and secured loans, which come with flexible features such as top-ups, repayment holidays and no early settlement fees.