The bank of mum and dad has become a useful option for many young people in the past few years, helping those in their 20’s and 30’s afford to buy their own home. However, it seems like it is also becoming a popular option for funding business ventures for a large number of small businesses and entrepreneurs.
Is it good practice to borrow from those close to you?
A new study from peer-to-peer lender ThinCats has found that 1.6 million British people have lent money to friends and family members to help them fund their business with parents the most likely to offer capital. This amounts to around £7.2bn worth of funding for many small businesses as a result of the difficulties of obtaining funding via more traditional means such as a bank loan.
This difficulty to lend money for business investment has seen a funding gap of around £4bn start to appear. Kevin Caley, founder and chairman of ThinCats who conducted the report, spoke about their findings; “Since the financial crisis in 2008, SMEs have had a pretty torrid time sourcing finance from traditional avenues, so it’s inevitable that some business owners are turning to friends and family for help.”
However, he warned about the emotional and personal baggage this kind of lending tends to come with and urged small business owners and entrepreneurs to look into alternative finance options. As banks turned down over a quarter of the 324,000 loan applications made by SMEs in 2015, there is a need to advertise and educate about the benefits of alternative finance options.
Since 2014, alternative methods of finance have provided small businesses and entrepreneurs with £3.4bn of funding support. ThinCats predicts this figure will grow as the government rolls out its program which insists banks that cannot help businesses redirect them to an alternative finance provider.
This scheme will help businesses obtain the funding they require, ease up the pressure on entrepreneurs and their family/friends as well as showcasing the benefits of alternative finance to those who may not meet strict bank regulations.
With many alternative finance options available from hire purchase, invoice discounting, factoring, peer to peer lending to crowdfunding, there is an option available to everyone whatever your sector, business size, turnover etc.