Money

In today’s hectic business world, it’s never been more important for entrepreneurs to stay on top of their cash flow and ensure they have the financial stability needed to run a business. However, with UK companies owed £41.5 billion in late payments, business leaders are turning to loans to avoid bankruptcy.

A recent survey found half of UK start-ups will fail within five years, with directors stating a lack of bank lending stifles growth. So, if banks refuse to support businesses through such testing times, budding entrepreneurs have little choice but to turn to their loved ones for personal loans instead.

The business impact

Once the first hurdle has been overcome and loved ones have invested in a business, the pressure to succeed increases exponentially. Of course, there will always be pressure on an entrepreneur, regardless of where the initial financial support comes from, whether it is a bank, savings or even a lottery win – no entrepreneur sets out to fail. However, if the money comes from your loved ones it becomes impossible to face failure. Imagine having to sit across a table from parents, siblings, friends or partners, knowing you had cost them money and have no way to repay them.

This can result in brash decisions being made with rapid growth in mind, rather than well thought-out strategy being at the heart of any judgements made. Although this is done with the best of intentions, as the sooner the business is a success the quicker loved ones can be repaid, the potential for failure increases rapidly if knee-jerk reactions take over the decision making process.

On the other hand, accepting loans from loved ones can also mean businesses don’t have solid foundations to build on. While loans from a bank are set in stone with an agreed repayment structure in place, this couldn’t be further from the truth when financial support comes from family and friends. For example, if loved ones are faced with unexpected difficulties, such as car failure or severe damage to their property which isn’t covered by insurance then they may request the loan is repaid sooner rather than later. If the loan isn’t legally recognised this will result in either the business losing funds they rely on, or a strained relationship which will become increasingly painful if repayment isn’t possible.

The personal impact

Once entrepreneurs leave the work place, the stress of cash flow persists and this is never more true than if directors are going home to their investors. Business problems don’t disappear at 5.30pm as for entrepreneurs; their business is the first thought in the morning and the last at night. Of course, when loved ones are relying on the business to be a success in order to gain repayment, the stress is significantly magnified.

Such large amounts of money being given to someone you’re so close to will always result in underlying tension; one which can boil over at any given minute. Something as simple as a disagreement over whose turn it is to do the dishes can turn into a full scale argument about money, putting unnecessary strain on relationships. This is especially true if these arguments persist as the business struggles to take off. There is nothing more disheartening for an entrepreneur than finding out their loved ones don’t believe in their idea and begin to assume the business is bound to fail. Relationships may be strained beyond repair, all because of personal loans.

Time for action

Understanding the pitfalls of personal loans is one thing, but if banks aren’t supporting businesses financially then there isn’t much of an alternative. However, there are things which can be done to alleviate the pain and stress of running a business while having to rely on loved ones for a financial leg-up.

The vast amount of money owed to UK small and medium-sized enterprises (SMEs) by suppliers is stopping business growth in its tracks, which in turn has a crippling effect on the economy. It’s therefore vital that action is taken to stabilise the market so business success isn’t dictated by third parties. To do this, late payment must be mediated to ensure the issue is wiped out rather than continuing to snowball out of control.

By removing the pain of late payment, SMEs will be able to manage their cash flow efficiently and personal loans can be paid back rather than swallowed to cover the black hole left by unpaid invoices. Only then will entrepreneurs be able to focus on what should be most important – growing their business.

By Chris Hawthorn, Managing Director at PACT Scheme