Family business financing in South Africa: A supply-side perspective

Background: Despite family businesses being the dominant form of business in South Africa, more than 60% of family businesses fail before the second-generation family members assume responsibility for the business. Current literature highlights that most family businesses in South Africa struggle to access credit from formal financial institutions. Aim: This study explores the financing of family businesses in South Africa from a supply-side perspective. Setting: The study explores how formal financial institutions (FFIs) perceive investing in family businesses, how the FFIs assess credit applications from family businesses and the challenges faced by the FFIs in providing credit to family businesses in South Africa. Methods: The study objectives were achieved through the application of a qualitative research design using an interpretivistic research paradigm. Implementing the five-step process of content analysis defined by Terre Blanche, Durrheim and Kelly, data were collected from 16 credit and business managers at head offices of eight formal financial institutions using purposive sampling and analysed. Results: The findings revealed that FFIs are very supportive when it comes to providing credit to family businesses that meet the lending criteria. Equity contribution, collateral, credit profile and audited financial statements are critical to family business financing. Conclusion: As the most dominant form of business, financing family businesses presents a good investment opportunity for most FFIs. However, FFIs also face many challenges when considering investing in family businesses. Contribution: This study provided insights on how FFIs perceived investing in family businesses, the credit criteria used by FFIs to assess credit applications, and the challenges faced by FFIs in providing credit to family businesses in South Africa. Additionally, using qualitative research design further contributed from a methodological perspectives to the literature on family business financing in South Africa.