Financing the Expansion of Family Businesses in Ghana: Which Way to Go, Debt or Equity

Financing activities are crucial exercises in any organizational set-up. It has attracted intense debate and scholarly attention in the financial management arena over the years, whether businesses should opt for debt or equity financing to expand their businesses or not. This paper attempts to ascertain the type of finance that family business operators in Ghana use to expand their business using Ashanti Region as the study area.Questionnaires were administered to 148 family businesses in Ghana. Descriptive survey study design was adopted to achieve the envisaged aims of the study. A total of 150 questionnaires were administered but 148 family businesses responded. Generally, the study revealed that founders or owner-managers use equity financing (68.92 %) as a source of start-up capital to commence their business activities. Also, founders or owner-managers admitted that they will only allow external investors (venture capitalist and business angels) to come in, if they would be prepared to offer advice and expertise to them alone, and nothing more.To establish whether family business use debt or equity financing for their expansion activities, a total of seven variables were used to measure the level of acceptance among the family business operators. These variables were analyzed using principle component factor analysis with varimax rotation.Varimax rotation with Kaiser Normalization was done to simplify and minimize the number of factors to achieve meaningful construction. As a result, 7 crucial variables were established as the sources of development finance by family businesses, which include external equity funding (venture capital and business angel), equity (family & friends, partnership) funding, rotational savings, owner’s equity, debt funding, re-invest profits earned, and government support, 4 factors are also established as sources of development finance by family businesses namely internal investment fund, mixed investment fund, external investment fund (funds from non family members) and source from anywhere. The paper seeks to establish that family business operators in Ghana utilize both debt and equity financing (mixed investment) for their business developmental activities. However, the equity financing is limited to family & friends, and partners alone and not private equity investors-venture capitalist and business angels. The study recommends that Ghana Venture Capital Trust Fund and venture capital companies should embark on massive educational and information program on venture capital support activities in order to disseminate the needed information to family business owners concerning the financing options and support services available to them.