Raising Finance

SMEs increasingly relying on friends and family for finance

3 min read

15 January 2015

Deputy Editor, Real Business

There has been a downward trend of traditional business lending and the alternative now seems to be borrowing money from trusted friends and family.

The ability to squeeze loans or investment out of more traditional sources is still a difficult endeavour. This was highlighted by Everline research, revealing that 49 per cent of respondents experience cash flow problems each year and a further 27 per cent experience them at least once a quarter.

This is possibly the reason why 55 per cent of SME business owners have come to believe that having fast and convenient access to cash is becoming more important to small businesses. It’s also why, after searching for different funding options high and low, they have set their eyes upon the funding option with the ‘least amount of risk’: being dependent on family and friends.

Russel Gould, managing director at Everline, said: “A small injection of cash can help a small business to develop its infrastructure, build a brand and recruit the right people–it does indeed take money to make money. However, it’s clear that small businesses are reliant on their own personal savings and those of friends and family to fill a gap or take advantage of an opportunity.” 

In 2014, Hilton-Baird Financial Solutions found that 19 per cent of businesses were using money from family and friends, up from 11 per cent the previous year. But, quite shockingly, this figure has now turned into a hefty 30 per cent.

Only 53 per cent of finance borrowed by small business decision makers comes from banks, suggests Everline. 

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The digital lender also revealed that 71 per cent of small business managers feel that banks don’t understand the changing challenges that small businesses face, which partly explains the borrowing from friends and family. In addition, 67 per cent feel that banks’ services, products and/or behaviours have not evolved to support SMEs in the last three years.

David Hing, small business insurance broker at YOUR Insurance, explains that “many will proclaim that this is the most risk free form of lending available to businesses, but it can arguably have the most impact on your life outside of your entrepreneurial world.”

This is something that Gould agrees with, suggesting that “borrowing from friends and family puts relationships under strain and is, without a doubt, a risky approach. Many people don’t even realise that there are alternative funding options to the banks, which is why they end up turning to their family.

“With the general election a few months away, I hope that the new government will do more to educate small businesses about their finance options and banks will better understand small businesses’ needs. Businesses no longer need to wait a week for a loan – they can get a cash injection in just a few hours. Fast and flexible finance is invaluable for small business owners, and they should embrace it in a measured manner when necessary.”

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