At Partnership Invoice Finance, we often find that Limited company family businesses will more than likely have initially been financed through loans from family shareholders and sometimes a small startup loan or overdraft facility.
Though funding in recent years has been more freely available, businesses often still run into blocks in the road when it comes to trying to scale the company, leading to stagnating growth and plateaus.
If the business is not fortunate enough to be self-financing and existing shareholders or family member’s pockets are only so deep, then additional external capital will likely be required to fund expansion or product development, or to see the business through hard times, like a certain global pandemic.
Family businesses are attractive to investors
Research by Credit Suisse during the global recession of 2011-2012 showed that family businesses outstripped their public counterparts in terms of performance, with 60% reporting revenue growth of 5% or more in the prior year. This robustness was attributed to a “quality first” approach and the close trust and commitment to mutual betterment found within family business relationships. For these, and many more reasons, Credit Suisse identified the family business model to be a “vital engine for economic recovery”. This was true during the last recession, and we expect, will be true as we begin to recover from the economic impact of COVID-19.
A family firm is more likely to hold on tight and weather storms like economic crises, periods of transition and uncertainty, investing for long-term growth over short-term wins. All the reasons why family businesses tend to remain strong during economic downturns are what makes them attractive investment prospects.
For this reason, there can often be queues of willing third party investors considering investment in family firms with a strong trading history, from high net worth individuals and private equity or venture capitalists to “Professional Business Angels”. But, this interest is often unrequited. There are unique reasons why family business owners are generally more cautious about who they invite to get into bed with them: With private equity comes potential demands for majority stakes and dilution of control.
Keeping it in the family
High on the list of priorities for family-run businesses is retaining control of the business within the family. By selling off portions of the businesses there can be a disruption of the culture of familiarity and trust that is unique to their business model. By relinquishing control and inviting third party funding and interest, the business becomes, well, less of a family affair.
When it comes to running a family business, all decisions can impact on the family relationships, business and management responsibilities often come with the added pressure of upholding a legacy, respecting memories and protecting the business for future generations.
The counter can equally hold true of course, toxic family relationships can damage the company, an inheritance that was never wanted or a sense of entitlement, a lack of fresh ideas and new blood and a tie to tradition and lack of innovation because “We’ve always done it this way.”
Of course, sometimes third party investment will be necessary, especially when it comes to buying out family members who wish to exit the business or capitalise on a previous investment. But in terms of funding expansion, there is generally a reticence amongst the family business community to look to third parties, particularly if it involves giving up a seat on the board of directors.
Family businesses want to raise capital without losing part of their business
There are of course sources of funding available for family businesses that won’t compromise integrity or control.
There may be the ability to finance the business within extended family, or at least within close personal circles. The ethos of a family business is trust, protection, shared values and history and achieving common success. It makes sense to offer investment opportunities to people you already trust to have each others’ mutual interests at heart.
Taking on debt finance is an option that can also avoid dilution of family ownership and control, but we are seeing tighter and tighter lending criteria here and ultimately accumulating debt creates burdens on future cash flow.
Asset-backed lending, where borrowed funds are secured against stock, property or plant and machinery, all has its place and is another option for family-run concerns. Unlocking value out of assets already held can make a lot of sense in terms of raising capital for a specific expense or project but repayments still have to be made out of cashflow.
Invoice finance can be a winning solution for family businesses
In a similar vein as asset-based lending, invoice finance is an option that can unlock cash tied up in a specific asset – the value of outstanding sales.
Businesses who extend credit terms to other companies can typically have one, two or even three months turnover tied up waiting to be paid, making the directors feel that their only option is to take out a loan to finance this. Invoice Finance gives immediate access to this cash without taking on fixed repayment loans and is a funding facility that grows as the business grows.
Invoice Finance can be suitable for businesses at every stage of their lifecycle taking into account as it does the creditworthiness of the customers and the value of the invoice, rather than the businesses finances and historic trading alone. For that reason, business owners with little credit history or previous issues might find themselves more successful when applying for invoice finance than when applying for traditional loans that leave the business in debt.
Invoice finance for family businesses can be a winning alternative to traditional funding, avoiding the risk associated with accumulating debt whilst protecting the family business from relinquishing operational control and ownership.
To find out more about how we can work together and provide your family-run business with invoice finance to fund your growth, contact us.