9 January 2024 – According to new research a large number of business owners are using their own savings to start their business. But help from family is becoming more and more important too.
The dream of starting a business can quickly turn sour if funding is hard to come buy. Research by wealth management company Charles Stanley shows that many new businesses get funding from more unconventional sources.
While the use of personal savings is still the top funding method, with 44% of business owners opting for this funding model, other ways of getting money are becoming more popular.
Family support is becoming more important as traditional funding routs, such as bank loans, are getting more difficult to achieve.
Family Becomes Important Funding Option
Charles Stanley has surveyed 500 UK businesses to find out how their owners have gained funding to kickstart their journey.
Even though still the most popular funding method to start a business is using individual savings, 20% of business owners are using an inheritance to fund their business venture.
19% are getting help from their parents to start their business. But it’s not just mum and dad that are helping out. 14% are using money from a family trust.
Grandparents provide much-needed start capital for 10% of new businesses. Other family members, such as aunts and uncles, also contribute 10% of initial funding, according to the study.
This means that 39% of funding is coming directly from family members, getting close to the most popular option of using own savings, which is what 44% of small company owners use.
It also overtakes bank funding, which is used by 21% of new businesses.
While getting help from family is great, it doesn’t come without risks for the investing family members. One in five businesses fail in the first year, which means funding provided is likely to have disappeared.
It’s the worst case scenario, but it could cause tensions within the family, especially if the funding was seen as an investment and a return of investment was expected.
Looking at the funding methods generally used by new start-ups, conventional channels aren’t the most popular ones. Only bank funding makes it into the top 10.
Other methods in use include money from the sale of a previous business, which 11% of business owners use. 10% use private equity, while an equal percentage rely on money from the sale of personal assets to start their business.
7% are mortgaging or re-mortgaging their home to get capital to fund their new business venture.
Bank Loan Most Popular Conventional Funding Option
When it comes to more conventional channels to fund a new business, bank loans are the most popular, with 21%. However, with borrowing costs at a high level, this isn’t an option for many new businesses.
Getting funding from a bank for a new business can also be a challenge, with many banks unwilling to lend to a new company with no credit file.
If you’re a new business and you’re looking to borrow £500 for a new laptop or tools, for many high street banks, then quite often the bank won’t lend to you because you have no credit file…
Rich Wagner, CEO of SME bank Chashplus
This means that many new company owners have to fall back on personal funds or help from family, as the study shows. But if those aren’t available, funding channels such as business networks are used by 10%.
9% get investments from their employees. Venture capital is used by 8% and 4% are using crowdfunding to get their business off the ground. While the latter is not used by a large number of new business owners, it’s a method that is becoming more popular.
Our Opinion
Being a small business ourselves, we know that getting the initial funding can be a challenge. With interest rates having risen in the past year, making borrowing more expensive, it’s not surprising that many new business owners rely on support from either personal funds or family.
Using your own savings can be a good way to kickstart your business; we have done it ourselves. But you have to be clear about the fact that you might not get them back. With one in five businesses failing in the first year, this is a real risk.
Dealing with a failing business is hard enough, but if it’s accompanied by the complete loss of your life savings, it can be even harder. It’s a risk you take, and you should be fully aware of it, when going down this funding route.
We would also advise having a frank discussion with any family member that is willing to lend you money for your first business venture. While nobody wants to talk about failure before the business has even been started, it’s important to make your family aware of the risks.
Having these discussions beforehand will make it easier to deal with the failure of the business if it happens.
