With a recent survey showing that family-run businesses account for 88% of all UK firms, it’s no surprise that investors are hungry for their business. Operating in a wide range of sectors, across all UK regions and employing almost half of the UK’s private-sector workforce, family businesses contribute significantly to the country’s GDP.

In addition, they have an ambitious appetite for growth and are focussed on keeping the family legacy going. But underpinning all this is an inherent reluctance to finance their growth via external investment.

Instead, family firms have traditionally focused their efforts on reinvesting their profits rather than taking on new debt. But, as the funding landscape shifts, are family businesses becoming more inclined to look at these alternative options.

The answer isn’t a resounding yes, but the progress is evident and it’s fair to say that the main areas of resistance can be overcome. The main one is simply a lack of knowledge and understanding (maybe even trust) in the range of finance solutions now available. So, let’s look into them a bit more.

There is also a common fear of losing control of the management of the business, especially when private investors are involved. And the myth that investors are simply in it for a quick return on their capital only adds fuel to the fire. But, with some perspective, this apprehension can be turned into a logical approach to seeking external finance (and maybe even a genuine interest in your business).

Whilst a first-generation family business would have automatically gone to their bank for a loan, second and third generations are becoming more open-minded. Yes, applying for a bank loan is a familiar process and the finance comes with a standard (and safe) set of terms over a given period. But they are not always the most cost-effective solution because you have never actually put them into competition with anyone.

This alone makes bank loans more difficult to access, but if you do get through the application process, is the high cost capital injection worth it just to maintain 100% equity? Banks no longer demonstrate a long-term vested (and genuine) interest in your family or its future, they will simply operate a transactional relationship with you. And they tend to lend to more established businesses that have evidence of a robust strategic plan and a healthy cashflow.

Download our guide on writing a robust business plan for funding

So, with the high street banks becoming a less accessible (and flexible) source of funding, the statements of reluctance are turning into questions of enquiry:

• How much business control would we realistically lose if we gave away a 5% – 25% equity share?
• Could we benefit from having external expertise in the company to support our growth?
• Do we have skills gaps that we could strategically fill whilst obtaining some valuable investment too?
• If people are investing with a genuine interest in the success of the business, would they really push for a quick return?
• Is our funding need urgent and would we benefit from finance that is more readily available?
• Are we aware of the full range of finance options available and how they could each benefit our business?

The very nature of these questions suggests that businesses are prepared to look beyond a bank loan. They are open to the consideration of other finance options and what they could mean for their business. In fact, it’s the way a growing family business should be thinking because if growth is a realistic potential, you need to do everything possible to make it achievable.

And obtaining the most cost-effective and strategically viable investment is essential to this, once the need for external funding has been identified.

The challenge within a family business, however, of having so much funding choice is reaching a unanimous (or even majority) vote on which route to take – that is assuming everyone is on-board with seeking external finance in the first place.

There is likely to be a mix of opinions amongst the key stakeholders, whether this be family members, outside employees or advisory roles such as non-executive directors, about the investment agenda, so making any actionable decisions could be a long and time-consuming process. Some will favour a debt route that costs more now, but retains the equity potential for their long-term gain. Others will be more strategic in identifying that sacrificing a small equity share now could be more beneficial to their long-term gain anyway.

So, let’s assume that everyone involved is at least up for looking into the business obtaining external investment of a non-bank nature, what are the options?

We’ve outlined some of the main ones here:

1. Equity finance with people involvement in your business:

• Angel investment
  High net worth individuals investing their own finance in businesses showing strong growth potential.
• Equity crowdfunding
  Finance raised by lots of individuals investing small amounts in return for an equity share.
• Private equity
  Money invested from private sources to turn a business around and exit with a positive gain.
• Venture capitalists
  Investors financing high-risk business start-ups and early expansion projects in exchange for a high rate of return.

2. Debt finance with regular payments over a fixed period:

• Business loans
  A traditional form of finance in return for regular repayments, with interest of course.
• Debt crowdfunding
  Finance raised by lots of individuals investing small amounts in return for regular repayments over a given period.
• Invoice finance
  Borrowing money against outstanding invoices owed to you, a good short-term quick fix to plug a cashflow gap.
• Trade finance
  Finance against imports and exports to reduce the burden of expanding your business overseas.
• Leasing & hire purchase
  Spreading the cost of key business assets over a given period to reduce the impact of big purchases on your cashflow.
• Business mortgages
  Specialist finance to support the purchase of property that is solely for business use.

There’s no doubt that, whilst it has its benefits, this range of alternative finance options can be a minefield. A huge relief to many family businesses, therefore, can be some external advice and guidance with expertise in the right places.

Seeking external investment is a significant step-change in the approach to growing most family businesses and the reassurance of someone to simply provide confidence through the process can be invaluable. This may come in the form of non-exec directors, specialist advisors or financial planners. The interests of all will undoubtedly lie with what’s best for the family and its future wealth.

So, whilst the funding landscape for family business finance is looking promising, you need to make sure that you do your research and find the finance that best suits your needs to achieve your planned growth. And then access the advice and expertise available to take you through the process. It’s a financial challenge worth tackling.