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What are the sources of finance for owner-managed businesses?
From organisations with large corporate structures to smaller, family-run companies, all businesses need the right form of financing to scale and grow. Owner-managed businesses have their own unique set of requirements when deciding the right source of funding. What options are available and how can they find the one that most benefits them?
What is an owner-managed business?
An owner-managed business (OMB) is one that is overseen and managed by its owners. These differ from companies with corporate structures that clearly separate the owners and managers of the business. OMBs are common across all industries and make up a majority of the total businesses in the UK.
OMBs are often small or mid-sized businesses where the owner or owners oversee each branch of daily operations. This facilitates close-knit relationships between employees and managerial staff, as well as stability in the overall business structure.
When compared to corporate bodies, owner-managed businesses tend to rely more heavily on trust and flexibility. In this environment, the question of which financing option to choose is delicate. Owners must balance the desire to facilitate growth with the need to safeguard the harmonious functioning of the organisation and, ultimately, the future of the business as a whole.
What are the sources of finance for these businesses?
A business loan is a basic form of financing that involves borrowing money on the agreement that it will be repaid by an agreed date – often with interest.
In the case of loans (or grants) provided by government, interest may not need to be paid, say for instance if the loan is provided as part of a strategy to stimulate growth in a particular industry. Private lenders, on the other hand, are seeking to make a profit on their lending. Repayment periods and interest rates will depend on the agreements between the investor and business.
Business loans can either be secured or unsecured. Secured loans require some form of collateral in case the business fails to meet the interest obligations or repay the loan. Unsecured loans do not require collateral but may require the owners to agree to pay back the loan if the business cannot. As always, it is a good idea to seek advice before agreeing the terms.
For owner-managed businesses, business loans can be a beneficial form of financing. The owners do not need to give up control of the business. As a result, there will likely be no change to day-to-day operations. However, the cost of servicing the loans can be significant and may limit a company’s ability to reinvest its earnings in growth.
Equity funding is a form of financing that involves selling shares in the business in exchange for finance. Equity funding typically does not require ongoing repayments in the way that a loan does. This allows investee companies to reinvest their earnings in growth. Some investors are able to provide considerable support in addition to money, such as corporate governance, market intelligence, strategic planning, advice on acquisitions and more.
Examples of equity financing are venture capital and expansion capital. Venture capital is ideal for businesses that are in the early stages of growth. Expansion capital is a form of equity funding that specialises in helping established businesses grow and which may be used to finance a variety of growth strategies – from new product development to mergers and acquisitions.
For owner-managed businesses, equity funding can bring vital funding, support and expertise to complement an owner’s plans for growth. However, as equity funding involves a transfer of ownership, owner-managed businesses will need to be sure the strategy and vision of the investor is compatible with those of the business. The goal is typically to enhance the management structure rather than overhaul it.
There is usually a difference in approach between investors who seek to take majority control of investee businesses and those that are comfortable being minority, junior partners. Owner-managed businesses should do their research and seek advice before deciding which is the best equity investor for them.
Growth funding for owner-managed businesses with BGF
Many owner-managed businesses want an investor that is dedicated to adding value and igniting growth, but which does not demand control over key decision-making. This, in a nutshell, is what BGF offers.
We are a different kind of equity investor that is committed to the success of each business we invest in through growth funding. We invest minority capital, keeping owners in control to set their own path for growth. Where we add value is through the expertise and experience of our teams, and the valuable connections we can introduce you to through our Talent Network – one of the largest groups of its kind in the UK and Ireland.
If you’re interested in partnering with an investor that puts your company’s growth first, contact our team today.
The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.
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