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UK family businesses self-fund growth, research reveals

By Michael Finnigan

Family businesses looking to raise capital for growth are increasingly turning to self-funded expansion in order to avoid traditional banking services in the UK, new research has revealed.

Family Business Survey 2014, produced by Charles Russell Speechlys and Family Business Place, found the preference for self-financed growth stemmed from real and perceived difficulties in borrowing from banks, and a general reluctance to take on debt.

The survey, which received responses from 360 family businesses, also found a widespread reluctance to broaden share ownership, with 87% of respondents owning more than 75% of shares in their companies.

Charles Russell Speechlys partner Andrew Collins said that family businesses are reluctant to take on debt or reduce their ownership stake because of economic uncertainty created in the wake of the 2008 financial crisis.

“The ease of access to growth capital varies on a number of factors, including the size of the business and the market sector in which it operates,” he said. “In our experience, banks are now more prepared to lend to strong businesses, but families are often averse to taking on new bank debt.”

According to Collins, family-owned businesses typically raise growth capital either by subscribing for more shares or by making loans to the business. He says families will also simply retain profits from the business.

Illustrating the desire to find alternative sources of capital, Collins says he has seen a number of large, privately-owned property companies raise long-term debt from US institutional investors through private placement financial transactions.

The survey also found that 55% of family business owners see succession as a major barrier to future success, while 62% of respondents said they would be prepared to sell up to avoid difficulties passing the business on to relatives.

Collins said that one of the major questions of the survey – whether a “closed shop” mentality was hurting family businesses – was overshadowed by more pressing issues for family businesses.

“Access to growth capital is important for all businesses, but 79% of respondents to our survey indicated that the biggest barriers to growth for family-owned businesses were competition from new markets, government bureaucracy and 'red tape' and the burden of taxation,” Collins said.

The Charles Russell Speechlys partner said that the absence of non-executive directors on the boards of family businesses further confounded these issues, and has left many family-run firms without sound strategies for implementing growth.

Peer-to-peer lending

An area of financing that is courting increasing attention among family businesses is peer-to-peer lending – the practice of lending money to unrelated individuals, without going through a traditional financial intermediary such as a bank.

Earlier this year KPMG released a report, which found many high net worth individuals (HNWI) fill the funding gap faced by privately-owned businesses.

The report, which surveyed 125 family businesses and 125 HNWIs, found that 42% of family businesses had previously raised financing from other HNWIs, but in most instances the HNWI is a close friend or relative.

Nearly 92% of those that have raised funds this way say that it has been a positive experience in comparison to financing from other sources.

Phil Emmerson, partner at accountancy and business advisory firm BDO and former advisor at KPMG, said the peer-to-peer lending industry remains in its infancy.

“The peer-to-peer lending market is growing, however, is very immature and faces an influx of regulation which is causing uncertainty and overcoming the trust and/or credibility challenge may therefore be an issue.

“While peer-to-peer lending works for some, in some instances it is used as a last resource at any cost, which is not necessarily a good thing.”

The first company to offer peer-to-peer loans was Britain's Zopa. Since it was founded in 2005, the London-headquartered firm has lent over £690 million. Lenders get a 5% annualised return over five years, after a 1% fee and expected defaults.

Peer-to-peer intermediaries, such as Zopa, are able to offer lower interest rates via reduced overheads, however, this removes the relationship between the lender and the borrower, which can be important should the business experience any form of financial difficulty, according to Emmerson.

The KPMG report found that 58% of those surveyed are currently seeking external financing to fund their business development plans and expansion is the priority for most in both the short term and the long term.

Charles Russell Speechlys partner Andrew Collins said the law firm “had not seen any real trend in peer-to-peer lending for privately-owned businesses”.