Business Owners Reaching Into the Cookie Jar for Financing
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Kentannenbaum | Dreamstime.com |
The lack of available credit is forcing small businesses owners to put their personal assets at risk in an attempt to finance their businesses with personal savings or other personal finances, according to new research.
Small and family-owned businesses looking to reduce their dependence on outside financing are utilizing two general strategies, said Tansel Yilmazer, a professor at the University of Missouri.
The first strategy involves diminishing or eliminating the need for financing by reducing the cost of operations and carefully managing the cash flow of the business. The second strategy is to acquire finances by raising money from personal and other sources external to the business without resorting to bank loans.
Yilmazer said businesses that use owner resources and delay payments for household expenses are the ones that typically report a need for further financing for their businesses. Because these business owners have not established relationships with banks, they may face problems obtaining future bank loans .
The recent recession has affected the direction of the resource flow from household to business and owners might be putting their own assets at risk for the business, Yilmazer said.
“Recession has increased the risk of business failure,” Yilmazer said. “Since business is inherently risky, financing with owner resources would seem to extend that risk to the household in ways that owners may not be adequately considering.”
Yilmazer found that the use of financial resources is a two-way street in small and family-owned businesses, confirming that the family and business interact — and that resource exchanges occur in both directions. She said that while small businesses can provide income for households, owners need to be aware that financing a business from household funds opens the door for household assets to become susceptible to losses.
“Business ownership is an important household investment,” Yilmazer said. “Ownership may serve as a source of income and expenses as well as an investment vehicle, but it is not generally understood or considered as a household portfolio risk. Small and family businesses may be riskier than other investments because they are more susceptible to attrition."
Yilmazer’s study was published in the Journal of Family and Economic Issues and was co-authored with Holly Schrank from Purdue University.
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