Entrepreneurial Challenges Faced by Family Business - Literature review Example

Entrepreneurial Challenges and Sources of Funds for Business Name: Unit: Course: Professor name: Submission Date: Entrepreneurial Challenges Faced by Family Business Family business is usually owned or controlled by members of the same family. However, majority of particular family businesses are not confined to a specific size but several of them are generally small businesses. They maybe be controlled under sole proprietorship, corporation or partnership. For a new family business, opportunities for success may be some of the goals for its startup but a few unique set of challenges may come in between its operation. Reasons being, those involved in management may be both emotionally or financially entwined. Additionally, family business may not be immune to general problems facing other business. It is possible that new family businesses have unique challenges that reduce its survival beyond entrepreneurial success. A new entrepreneurial venture such as family owned businesses can experience misplaced business goals for future business endurance. Often, chances for family businesses continuing to the next generation is very high. And so, for a soft transition process from one generation to the other, the family long term future goals must be established from the start. Therefore, with a under developed long term strategic goals, the children of the subsequent generations can grow up having difficulty in planning significant changes (Zahra and Sharma, 2004 p.334). Just like any other business adjustments of goals in family owned business are necessary over time to account for changing real-world developments and other evolving market conditions. Family businesses may sometimes be difficult to control due to separating family from work. Dual-role relationships is one of the biggest challenges faced in new family-owned businesses. Managing such challenges like balancing work and family dynamics may distract some of the business operations. Zahra and Sharma (2004 p.340) argues that having separate family members who are not getting along in a work place, makes the work environment uncomfortable for the co-workers who are not family members. Additionally, close relationships amongst the family members may not establish boundaries in the workplace and so maintaining respectable distance can be difficult hence generating poor working environment. Use of family names around during business times can create impacts in terms office behaviours around employees and clients. New family businesses can face unclear family employment policies. For instance, the qualifications family members need to be considered in the family businesses for employment or obtain a leadership role within the company sometimes don't have any clear policies. Lack of reforming rules of employment come along with the under developed detailed family employment policy which is one way of creating ambiguity in the business. According to Zahra and Sharma (2004 p.332), the policies act as rules for family businesses and explains matters including kinds of roles that exist for family members within the organization, what the business actually needs in terms of experience and talent, factors to be considered for employment or other preferred preparations required and the performance standards and behaviours that would be used to gauge the family members performance once employed. Zahra (2004 p.335) argues that a new family business can face lack of proper management succession plan. For the failure of the family business, poor management on succession planning is often identified as the biggest cause. Typically, when the founder of the business neglects to plan for a successor and spend more time and energy working to build the company, then unanticipated failures in the business are likely to occur. Afterwards, when unexpected occurrences such as the founder dies or become incapacitated, then control of the business passes to a close relative is not well prepared to running a company. Family-owned business just like any other entrepreneurs, from the beginning they can lack or have insufficient start-up and future capital to run their operations. Startup capitals for various family business can be a setback that comes along with the funding of a new business. Since they mostly depend on loans from family, friends and other financial institutions, it cannot be enough to pool all the required capital for business sustainability in its upcoming stages (Zahra and Sharma, 2004 p.340)). On the other hand, it may be accompanied with various challenges whereby to fund the business, selling of family owned properties to stream revenue can be the necessary option. Regularly, the most difficult part for an entrepreneurial startup is raising the money to get going. Despite of the clear idea and creativity of certain business from the entrepreneur, its success will greatly depend on the sources of finance available for the funding (changes (Zahra and Sharma, 2004 p.346). However, it is likely that the business will get off the ground if enough finance can be raised. Finance needs of a start-up should take account of the set-up costs, working capital, and growth and development. Therefore, sources of finance for a startup entrepreneur can be equity capital or debt capital. Sources of Finance an Entrepreneurial Start-up Equity capital act as the owner’s personal investments in the business. It is accompanied with the risks of losing money from the investors if the business fails. It involves a venture whereby it is a form of equity financing used to finance high-risk businesses with exceptional returns (Cassar, 2004 p.280). There is a relationship between the entrepreneur and the business capitalists and they hold a delicate factor of company's stage of development when the investment occurs. The main contributors of the equity capital may include, private venture capital partnerships, small business investment corporations, specialized small business investment companies, personal savings, and friends and family members. Advantages and Disadvantages According to Cassar (2004 p.275), through equity capital, the sources of financing such as venture capital companies may provide reliability as investors to businesses have the ability to raise large amounts of capital, they can improve the cooperate image where necessary, when it comes to future financing they can be able to provide the entrepreneurs with the accessibility, through better and reliable financing, the key employees of a particular business can be retained encouraged to stay and also remain in a condition of boosting their morale since there are enough funds for salaries and other financial contributions. On the other hand, it does not have to be repaid back with interests like other loans. Cassar explains that (2004 p.283), since it is risk capital, the possibility of the losing their money is very high and so most of the investors do not prefer to engage themselves with sourcing small business which are at their development stage. Also on the side of the entrepreneurs who require funding, they must be in a position of giving up some part of their ownership in the business to the external investors. For venture companies, they are most likely to invest a few portions of their venture capital to a business in the startup or seed phase. Lastly, with the friends and family members, small businesses may face rejections from them since due to poor relationships and coordination. Debt capital is also another source of financing any startup business. It is identified as the investment that a business raises by taking out a loan. It is a loan normally repaid at some future date whenever made to a company (Cassar 2004 p.280)). The sources of debt capital may include the commercial banks, asset based lenders, saving and loans associations. Asset based lenders comprise of inventory financing and discounting accounts receivables. Advantages and Disadvantages Advantages that are usually accompanied with debt capital may include relative to equity capital, a business does not give up any ownership or control of the business to the investors (Cassar, 2004 p.271). Additionally, as far as having access to low interest rates debt financing can allow the business to for the assets before earning any funds. Whereby leasing assets can be used in place of buying assets. And therefore, with such a strategy the business can be in a position of pursuing an aggressive growth strategy. Debt capital have various disadvantages and hence can lower the operation rates of a startup business. The following can be disadvantages of debt capital as a source of capital to businesses. According to Cassar (2004 p.262) the finances must be repaid with interest, in the balance sheet, it is always carried as a liability on the company’s balance sheet. In contrast with equity financing, debt capital can be difficult to secure despite of the numerous debt financing sources. Additionally, for small companies, it can be very expensive to consider debt capital as a source of finance since it is always accompanied by risk or return trade off. In conclusion, the challenges of running a family business comes along with the both internal and external forces. Each of the challenges are the factors undermining the growth of small family businesses. On the other hand, debt and equity capital are stated as the main capital sources for financing a new business. Therefore, with all the sources, a firm is purposed to endure through the long and short term financial plans. References Cassar, G., 2004. The financing of business start-ups. Journal of business venturing, 19(2), pp.261-283.[Online]. http://www.sciencedirect.com/science/article/pii/S0883902603000296. Accessed 5/30/17. Zahra, S.A. and Sharma, P., 2004. Family business research: A strategic reflection. Family Business Review, 17(4), pp.331-346. Read More