Friends and family borrowing for business is on the rise

A recent survey has highlighted that the rise in borrowing from friends or family to fund business start-up or growth has increased significantly, from 19 per cent to 30 per cent in the last year. The belief is that traditional lending sources are seen as too challenging – and with a relatively high number of businesses experiencing cash flow issues, sometimes funding has to be sought.

The friends or family route can be seen as lower risk – and this could be true. There are many instances of lending in this manner we have seen that have worked out well for both parties; there’s no reason why the lender can’t reasonably expect a return on their loan of an interest rate in line with other lending sources, and the borrower can access the funding they need without having the jump through the various hoops involved with traditional lending sources. However, this kind of lending is not without its challenges – it could easily put a strain on relationships if things don’t quite go to plan.

So whilst this can be a viable lending route, it’s always worth full investigating the types of lending available to you as a small business.

There’s been a real surge in popularity of crowd funding, for instance, whereby money is pooled by a number of small investors to fund a venture. It’s a great idea and has grown out of the reduction in traditional business investors/venture capitalists, who aren’t as forthcoming as they once were with lending as risk increased and business appetite decreased in the economic downturn. This type of funding however is still relatively new and very much seen as an emerging sector. It’s wise to do thorough research of opportunities and get some insight from businesses that have taken this route, to avoid potential pitfalls.

The regular private equity route has emerged stronger as the recovery has taken hold and can be a good route for businesses with a proven track record and some relative success, that need funding to take them to the next level or take their product or service to a new or more diverse market. As an equity provider will want to get involved with the business and decision-making, as a shareholder, this can add great value to a business, but can come at a cost. Ensure the details of the deal are clear from the outset.

Asset-based borrowing is another good route; borrowing money against business assets such as equipment or property – or even debtors. Banks can offer this, but there are some specialist providers too. Again, ensure you’re aware of all the interest rates, penalties or opt out clauses to ensure you’re not restricting your options in the future.

Arguably, banks still have work to do in bringing their products and services up to date to meet the needs of the SME, so although we’d suggest this is usually the most straightforward of lending sources, it’s certainly not the only one to consider.