What Is The Best Approach For Raising Capital?

When a family-owned firm needs capital to help grow the business, there are many creative options available, in addition to getting a loan from your friendly local bank. The SBA’s publication “Challenges in Managing a Family Business” includes a partial list:

“! Taking or refinancing a mortgage using the company's assets as collateral.
! Asking suppliers to extend credit on purchases.
! Factoring (selling) the company's receivables.
! Inventory financing.
! Borrowing from friends on a personal note basis.
! Borrowing the cash surrender value of life insurance policies owned by relatives.
! Obtaining a long-term loan from an insurance company.
! Working with a lender and the U.S. Small Business Administration (SBA) to get a business loan.
! Financing with a Small Business Investment Company licensed by SBA.
! Selling a portion of the stock for cash to the company's employees.
! Selling some of the stock for cash to another company. In a merger, you can use the credit of the larger company.
! Contacting a regional investment banker who may privately find a lender, using some of the company's stock as collateral.
! Contacting a national investment banker who will underwrite some of the company's stock. This is called going public.”

It is of course important to keep in mind that not all of these options are good choices for every family business. Setting aside purely operational issues, a family owned business needs to consider how these financing options might improve (or upset) the firm’s current ownership, management and family relationships. Some of the many questions to consider:

• If employees own a portion of the company, do they share the family’s long-term goals and plans for the business? Or is the business “just a job” for the employees?
• If a non-family member owns a substantial portion of the company, would this enhance the family’s relationship with the business? Or would later generations feel that the legacy has been sold off to an outsider?
• If the company has a bank loan, do the bank’s financial reporting requirements provide an framework of good business practices? Or does the financial partner interfere with the operating flexibility that can be a unique strength of a family owned business?
• Do all of the family members reach the same answers to these questions? Or are there differences of opinion that need to be understood?

There are no “right” answers to these questions. Because each family is different, each family-owned business is different. The best approach to raising capital is the approach that respects these special considerations, instead of focusing merely on comparing financial terms.