Home Money The Bank of Mom and Dad is used by entrepreneurs to finance new businesses

The Bank of Mom and Dad is used by entrepreneurs to finance new businesses

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According to Zempler Bank, small businesses have difficulty accessing financing and rely on personal savings

The rising cost of starting a business is pushing owners to tap into personal savings and the Bank of Mum and Dad, new research suggests.

The average cost of starting a new business is now £16,000, or slightly lower, £11,500 for sole traders, according to data from SME bank Zempler, which this week changed its name to Cashplus.

Access to startup costs has proven to be one of the biggest barriers founders face.

According to Zempler Bank, small businesses have difficulty accessing financing and rely on personal savings

Zempler’s research shows that while a quarter of businesses do not need funding, 62 per cent of micro-business owners used an average of £11,000 of personal savings.

A further 13 per cent of entrepreneurs turned to the Bank of Mum and Dad for a loan or gift of, on average, £6,400.

Only 7 percent of respondents obtained financing through a business loan, highlighting the small role that large lenders play in the day-to-day operations of the country’s smallest businesses.

Small businesses have repeatedly expressed concerns about their lack of access to finance, with previous studies showing that nearly half rely on a personal credit card to finance their business.

The Federation of Small Businesses (FSB) has previously written to the Financial Conduct Authority highlighting the “harsh” lending practices of banks requiring personal guarantees for business loans.

Rich Wagner, director of Zempler bank, says more needs to be done for small businesses

Rich Wagner, director of Zempler bank, says more needs to be done for small businesses

Rich Wagner, chief executive of Zempler, told This Is Money: “When I founded Zempler, I saw first-hand the difficulty of dealing with traditional banks. While we’ve seen significant improvement in recent years, especially in their investment in digital, they are still not prepared to serve startups.

‘The result is that micro-enterprises and start-ups are considered unprofitable and not worth the effort.

‘The research confirms much of what we have seen over years of working in this market. It is a real testament to the resilience and desire of many new businesses. Not all of them need money to get started and some will be able to ‘self-fund’ as they start to generate revenue.

‘It’s telling that many will rely on their personal savings or the bank of mum and dad, that’s all very well, but what about businesses that don’t have this option?

‘The average age of micro-business owners and data on business failures suggest that many businesses are slowed down or stunted if they cannot rely on funding from family and friends.

“This is where traditional lenders and policymakers need to recognise the value these companies could bring to the wider economy.”

Lack of access to seed funding was one of the biggest barriers founders faced: 44 percent said it was a “significant threat,” while 37 percent felt their poor credit held them back.

Given the enormous financial risk, fear of failure is the most common personal barrier according to Zempler’s survey, as well as a lack of understanding of taxes, financial management and the loss of a previously stable salary.

Nearly a third of founders said they found the process of starting their business more difficult than they had anticipated.

Despite this, 83 percent of entrepreneurs say they do not regret starting their own business and 86 percent say they love working for themselves.

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