Family Business Financing Misconceptions: 7 Myths

As we’ve worked with clients over the years, I’ve always found interesting the number of myths people buy into.

And while some of those myths can be amusing, they also can be limiting to your success as a business owner.

It’s important, when you’re leading your family business, to do the due diligence to dispel any myths that are standing in the way of your success.

This is especially true when it comes to financing.

You owe it to yourself, your business, and your family to make sure you have sound information about your best sources of financing – not falling prey to myths and superstitions.

Here are 7 of the most powerful financing myths we’ve encountered in our years as family business consultants:

  1. Banks are the only safe place to borrow money
  2. You don’t necessarily need a business plan
  3. It’s too expensive to borrow money
  4. You should only seek financing from someone you know
  5. You should only ask for help once you have a problem
  6. Gaining the right funding is a short and easy process
  7. The interest rate is the only factor to consider about financing

Now let’s take a closer look at why these myths won’t serve you well.

1. Banks are the only safe place to borrow money

This is one we see a lot – many business owners think a bank is their only option when it comes to securing financing, and that simply isn’t true.

There’s no doubt that banks are a very good resource, and they certainly are the best option in a lot of instances. But today in the world of the Internet and other ways of raising money, you have quite a few other good choices. In fact, there are many creative options for financing your business.

Your real challenge is to find what fits best for the given circumstances.

That could be anything from a fin tech application or a private lender to even what some people call hard money lenders. The key point is to get alignment between your need and the resource so that it’s economically beneficial.

2. You don’t necessarily need a business plan

Some people think they don’t need a business plan, and I couldn’t disagree more.

In my experience, to be successful you have to prepare – and you must prepare in a way that is commonly understood by everyone on your team.

You have to present not only a verbal narrative that describes your goals, mission, and vision, but also some financial and numerical information in a manner that is well accepted among your team. Otherwise, you’re constantly dealing with competing interests and goals among your team since they’re essentially directionless.

3. It’s too expensive to borrow money

Yes, interest rates are high.

But – the reality is, your decision should always come back to the cost of capital versus the potential return on investment of that capital.

In some cases – hopefully many – the cost of the capital ultimately is less than the return on it.

So, it’s still additive to your bottom line to use third-party financing and capture an opportunity rather than lose it.

Many times, the business needs of having cash/funds outweigh the cost. In other words, availability of cash is more important than the cost of the cash.

Managing the risk of the cost is important, but the idea that borrowing money is just too expensive shouldn’t automatically be a deterrent.

4. You should only seek financing from someone you know

Some business owners only want to borrow money from someone they know.

And I think that’s an incorrect, and even dangerous, myth.

Here’s what is true, though: it requires a personal contact to trust a lender. It’s important to identify someone who is experienced at assessing what your need is and who is able to point you in the right direction. Someone who’s a good fit for what you need.

Do your homework on your industry, talk to peers in your industry, and use those leads to connect with a good lender.

5. You should only ask for help once you have a problem

Waiting until you have a problem to ask for help almost always means that you’re too late.

I believe in the mindset that the best time to look for financial resources is when you don’t have a financial need.

This allows you to build a relationship with a lender when you don’t really need anything immediately. That takes a lot of the anxiety away – both for you and for the lender.

You’re showing that you can think ahead of a crisis or other urgent need, and that sends a very positive message to any potential lender.

6. Gaining the right funding is a short and easy process

Like most things related to financial matters, securing financing takes time.

You should expect a four-to-six-month period to assess and prepare to identify the right resources.

Don’t expect to get the best financing for exactly what you need by taking shortcuts.

7. The interest rate is the only factor to consider about financing

Many business owners buy into this myth, but that doesn’t make it true.

While the interest rate is an important consideration, other factors should also influence your decision.

Equally important to the cost of capital are intangibles. For example, the importance of a good strategic fit or synergies that some financing resources may be in a position to offer versus others.

This is why having an experienced advisor to help you articulate your needs and evaluate your options is essential.

Looking for some support as you consider financing options?

Our team at Ferguson Alliance stands ready to help.

Please contact us today to set up an introductory call with one of our experienced family business consultants. book a call

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