Issues in Financing Family Business

It is largely recognised that family businesses can be seen as the backbone of the economy as they help to build and stabilize it when listed companies cause problems. Deloitte recognizes this: ‘here at Deloitte we believe passionately in the importance of the role played by unlisted companies in helping continued recovery of the economy.’ Family businesses can have this impact on the economy as in 2008 they contributed to 31% to GDP in the UK, they are attributable to 10% of overall tax income and create 42% of private sector employment therefore are the key to a sustainable and growing economy.

As family businesses are detrimental to the economy surely they need to continue growing in line with the economy and LME’s however as the majority of family firms don’t want to give equity away how can they grow without finance and capital. This is a concern and a limitation for family businesses and would not impact the economy but also communities through the philanthropic way in which they tend to contribute to the communities they operate in. Not only do they not want to give equity away but capital lenders also tend to refuse to deal with family businesses as they don’t produce any documentation beyond annual accounts, are closed environments on any problems they may be encountering and are protective of family secrets.

 

In addition, agency problems exist within family businesses as the manager is often the head of the family and will serve their own needs rather than those any investors may have therefore will lead to investors not trusting the family business with their wealth and without that wealth it prevents the family firms undertaking activities in order to expand and grow. Alongside their difficulty in obtaining finance, family firms have to deal with more issues than other firms as not only do they have to manage the dynamic of running a business but also the family relationships within the business that may result in conflicts. These conflicts could be from who will be the successor, younger generations may not have the same business or financial goals as the incumbent which could stifle the firm and the different values in individuals may effect financing decision for example cash vs credit.

 

These traits of family firms mean that they have to raise finance by other means; research by Coleman & Carsky (1996) showed that loans from family members and other informal sources of capital are the major sources of financing for small businesses, however more recent research has found that there is no difference between family and non-family businesses in the way they use credit and in fact it is the size, age and profitability of a company that determines how they use credit to finance their company and the fact it is a family business doesn’t limit their use of credit in order to grow.

Therefore it is not that family firms don’t make financing decisions, but it is effected by various factors and as with any organisation it is getting financial planning right that determines how the firm grows. With family firms needing to ensure that this remains stable as they are usually a major part of the communities they are based in, and can’t risk rumors about their financial stability causing them to loose faith as this is normally their USP and without family firms it won’t only be the communities that suffer but the economy on a wider scale.