A fifth of small business owners turn to Bank of Mum and Dad

• A fifth of UK start-ups are first funded by an inheritance, Charles Stanley says
• But most start-ups fail in first three years, and things could go sour
• It comes as small businesses face struggles to access cheap cash 

The Bank of Mum and Dad has long provided young buyers with a helping hand to get on the property ladder. 

But now it seems the ‘bank’ is branching out into business loans, as entrepreneurs increasingly turn to their parents for help.

New research by wealth manager Charles Stanley reveals a fifth of UK start-ups are initially funded by an inheritance, and a further 19 per cent by cash from parents.

And it’s not just mum and dad bearing the brunt, as 14 per cent draw on a family trust to kick start their business. One in 10 asked other family members for cash, with another 10 per cent using the Bank of Grandma and Grandad.

Relying on family cash can come with risks, however. 

Most start-ups fail within the first three years, so if the business goes sour there could be serious consequences for all parties.

While traditional routes of funding tend to have contingency plans for these scenarios, loose familial arrangements might prove more testy. 

Access to cheap finance dries up 

It comes as access to cheap liquidity options dries up. Caution in the sector means just 8 per cent of businesses receive initial funding from venture capital firms, while 10 per cent comes from private equity.

The most popular option continues to be personal savings, with 44 per cent using their own cash, followed by 21 per cent taking out bank loans.

However, access to bank loans can be difficult for small businesses. 

Recent research shows nearly half of small business owners have to use a personal credit card to keep afloat.

For those who don’t have access to venture capital funding, squirrelling money away and relying on personal loans can often be their only option.

Rich Wagner, CEO of SME bank Cashplus said: ‘Part of the issue is that new companies understandably have no credit history. 

‘If you’re a new business and you’re looking to borrow £500 for a new laptop or tools, for many high street banks, then quite often the bank won’t lend to you because you have no credit file…

‘What inevitably happens is that the business operates through a personal current account. It may be easier, but the products aren’t tailored for businesses and it makes it difficult to reconcile taxes. 

‘Alternatively, people then rely on personal savings or the Bank of Mum and Dad.’

Some entrepreneurs are pushed to other options such as selling personal assets (10 per cent) while 7 per cent have remortgaged their home.

Elsewhere, crowdfunding has become a popular way for high-profile businesses to fund growth. 

Monzo, Revolut and Freetrade are among the leading companies that have used it to raise cash and give investors a slice of equity.

However, just 4 per cent of entrepreneurs use this route for initial funding, the same proportion of those who used lottery winnings.

Andrew Meigh, managing director of financial planning at Charles Stanley, said: ‘UK business is, at least in part, a family institution. 

‘For many entrepreneurs starting a new venture it is their own savings or inheritance on the line, so it is important that there are conversations about their personal and family wealth alongside a drive to build their business in the most tax efficient way.

‘Careful planning is essential so that entrepreneurs and business owners, who have multiple considerations to manage, end up with the best possible outcomes. 

‘This assertion is especially supported by the finding that almost half of business owners are first-time entrepreneurs, and 20 per cent are accidental entrepreneurs.’

> Wealth planning for entrepreneurs: Is it worth enlisting a financial planner?

Business remains a family affair for those looking to fund growth once established, too. 

The research reveals 15 per cent said they used an inheritance to help further grow their business, while 13 per cent relied on their parents.

The number of entrepreneurs using their own savings dips to 33 per cent for subsequent funding, while the proportion using bank funding increases marginally from 21 to 23 per cent.