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Like many small businesses, family-run operations often seek business financing to expand operations and develop new products. But business owners will likely take a different approach to funding the family business than other entrepreneurs or startup founders would—they want to stay in business, of course, but they’ll prioritize retaining management of their company, and think about how their financial decisions impact future generations.
The good news is that family businesses can be attractive to both potential lenders and investors for a number of reasons. Tight-knit family organizations are more stable during economic downturns, transitions, and expansion, which means a mature family business might be poised for venture-backed growth. And even without previous financing, a well-established family business can use a strong financial history to present a solid case for a capital investment or loan.
Finding the right source for funding the family business will secure the capital you need to maximize your growth and ensure that your business is sustainable for generations to come. Here are five of your best options.
The best method of funding the family business depends on your long-term financial goals, how much control your family wants to maintain, and the plan for the future of the operation—any outstanding debt you carry may tip over into the next generation, so it’s important to consider the long-term implications of debt financing.
All these factors, in addition to assessing which types of loans you’re eligible for, should influence how much debt you take on and in what form. Start your search with the five following types of loans.
The best place to start your funding search just might be close to (or inside of!) your home.
People who are close to your family and business might be willing to invest capital without requiring you to relinquish control of your finances and operations as a traditional equity investor would. Plus, friends and family who are familiar with your business and understand how you’re hoping to grow can make for trustworthy lenders and might offer better terms and less fees than a traditional bank loan.
As a bonus, you won’t need to prepare a traditional business loan application (and meet stringent business loan requirements) if you turn toward your family and friends for funding.
So, if you’re looking into funding the family business and may read as risky to traditional lenders—maybe your personal credit score is challenged or you have substantial outstanding debt on your books—then a family and friends loan might be your best option.
That said, you should thoughtfully consider the risks and costs of any financial agreement you enter into, and your closest allies are no exception. Make sure to get your loan agreement in writing so that there’s no room for confusion, and work with an attorney if need be.
In the simplest terms, equity financing is raising capital using investors, as opposed to borrowing money from a financial institution. Private equity firms, angel investors, and venture capitalists are all examples of potential investors. In exchange for shares of your company, an investor provides you with working capital and is paid back in the form of returns.
Family-owned and operated businesses often want to keep management, well, in the family—so small business owners might be reticent to give up a stake in their business. But if you can find it, equity financing can generate the capital you need to maintain and grow your business.
Selling shares of your family business to outside investors might seem drastic, particularly if you’re working to plan for the next generation of your family business. But raising capital for your family business with equity financing doesn’t necessarily mean selling out to professional VCs, or giving up control of your business to a board of investors. Before bringing on outside investors, it’s important to determine which aspects of your business you want to preserve and understand the expectations both parties have for the transfer.
An outstanding, original product or enthusiastic customer base can help you secure the funding you need, without a bank loan or private equity investor.
Before La Dorita artisan dulce de leche products became available in Whole Foods stores, Josephine Caminos Oria used the crowdfunding platform Kickstarter to raise over $50,000 for her family business.
“In order to fulfill our first dulce de leche orders from Whole Foods Market, we were required to produce our product in a licensed commercial kitchen. With no other options at hand, we decided to build our own commercial kitchen in the dining room of our home.”
Thanks to their crowdfunding initiative, Oria secured the funds she needed to renovate her home kitchen and land the all-natural sweets company into stores nationwide.
Small business programs geared toward funding specific initiatives can be a great resource, provided you’ve already determined where you plan to spend.
After her successful Kickstarter campaign, Oria went on to found Kitchen Share, her own incubator program, using her knowledge of running a family business, securing financing, and scaling production—and then she leveraged the incubator to lock down even more funding.
“La Dorita Cooks secured a 10-year, below-market (1% interest), forgivable loan of $28,075 through Neighbors in the Strip, Inc. to create a minimum of 19 new full-time permanent positions of which a minimum of 75%, or 14, will be filled by low-income individuals. The loan has monthly payment of $245.95/month. Upon each loan payment to Neighbors in the Strip, Inc., an amount equal to La Dorita Cooks’ payment is returned to La Dorita Cooks within 30 days so that we can continue to create jobs with those funds.”
One strategy for finding a sustainable source of funding for your family business is to look into different small business programs in your community. Programs that support hiring diversity, environmental initiatives, and industry special interests often incentivize business owners with grants or friendly loan terms, and can be great educational resources for business development. Start by looking into SBA resources for small business grants.
Businesses with outstanding receivables can use invoice financing to gain access to the capital they need, using their unpaid invoices as collateral. More than other financing methods, invoice financing is based on the creditworthiness of your customers and the value of the invoice, rather than your business finances. For that reason, business owners with challenged credit might have a better chance of approval for invoice financing than traditional, debt-based loans. Also note that invoice financing is only an option for business-to-business models—since a lender is relying on the invoiced business for payment, they’re looking for invoices from creditworthy companies, as well as a solid payments history.
James Stefurak and his wife’s business Invoice Factoring Guide provides financial consulting for small businesses. He offers invoice financing as a good alternative to the funding sources that might carry too much risk, like a bank loan, or demand too much operational control, like a private equity or venture capital financing.
“If the business operates in the B2B segment, we suggest accounts receivable factoring as a source of funding. As an asset sale, there is no debt incurred and no equity sacrificed. Plus, the funding is much quicker than traditional financing, especially if it’s a bad credit business loan. Factoring isn’t always the cheapest option, but it improves cash flow and lets the family retain ownership.”
If you’re not running a B2B business or your invoices aren’t strong enough to qualify you for invoice financing, you can look toward other asset-backed loans instead. Machinery and equipment, inventory, real estate, and tangible assets are often used as collateral in asset-based lending. That easily liquidated collateral mitigates the risk to the lender, which may make these loans easier to qualify for and land you better terms.
If you work with your family, you know that your business is much more than just a business. Running a family business is an emotional investment as well as a financial commitment, and your decisions could impact many generations to come.
Any major shift in your business is bound to cause growing pains, but it’s possible to grow sustainably if you’ve carefully considered which aspects to focus on developing and secured financial support that won’t end up hurting you down the road, like a too-big loan or an overbearing private equity investor.
Taking care to find investors or lenders who understand and support your mission in addition to your bottom line is the best way to ensure that funding the family business doesn’t compromise its values. Just ask Rexy Rolle, the VP and general counsel for the largest private airline in the Bahamas, Western Air, whose parents founded the company in 2000, and it’s now worth over $90 million.
“Our customers are family, and we treat family members with pride and the utmost respect. In building your capital, be sure you do your research to ensure your finance partners or investors understand your vision and what it will require.”
Family businesses have unique strengths, because families who work together effectively have a natural willingness to collaborate, commitment to the company, and shared core values. The right funding source allows you to maintain the most important parts of your family business while empowering you to realize the fullest growth potential, and pave the way for the next generation.