Financing Business Expansion - What are your Options?
How to Finance Business Expansion
You have an established business and are ready to take the next step. Maybe you want to purchase a new piece of equipment, expand your workforce, introduce a new product or open up another location. There are numerous possibilities for business expansion, but first you have to invest in growth. Understanding some of your options for funding growth will help you make the best decision for your unique situation.
Start with your business plan and identify how much money you will actually need. To avoid borrowing beyond your means, match the financing type with the expense type you are making. Credit cards or lines of credit, for example, may be suitable for small spending like payroll or recurring expenses, but may not be suitable for long term financing, such as new equipment or delivery vehicles.
The next step is to look at your options. Here are some common choices that many small business owners rely on to finance expansion. There is no right or wrong answer and the best strategy is seek advice from an experienced business consultant or to do your research to find the one that fits your long-term goals.
These are the Best Sources of Finance for Business Expansion in 2018
Many small business owners look at personal savings or personal debt (such as a credit card or second mortgage) to fund expansion plans. This is a responsible way to get you to the next level and shows potential investors and lenders that you are personally committed to your business success.
Finance by Family and Friends
Borrowing from family and friends can be a good option early on. There is less outside pressure and you can create a mutually beneficial plan for delivering a return. But, it can be risky and also harmful to your relationship if things don’t go as planned. To set you up for success, keep emotion out of it. Create a solid agreement with a clear repayment plan that you agree on.
Use Current Profits Financing
Business profits are essentially savings, much like your own personal savings account. Using these funds can be an effective strategy for some businesses, allowing you to maintain full control of your company without opening up to outside investors or creditors. This route doesn’t add to any current debt or reduce your profits through interest payments.
Small Business Loan Financing
If you have good credit, a small business loan is a common form of financing. To qualify for a small business loan, you generally need to be in business for two or more years with solid annual revenues. An asset secured business loan for larger amounts offers flexible security options like residential and business real estate or business assets. Many banks offer flexible payment options and interest rates.
An angel investor is typically a wealthy individual ready to invest in businesses and who is willing to accept risk with little or no control in return, in exchange for convertible debt or a high return on their investment. You may give up part ownership but in return you’ll likely get experience and contacts that come along with your investor, and better yet, you won’t be stuck with loan payments.
Consider crowdfunding if you have a large network of customers and followers who feel connected to your business and who are eager to help raise the funds you need. Create excitement about your expansion plans, and encourage contributions through any one of the many online crowdfunding platforms. Donation-based funding via an online platform means your campaign is not limited by physical location and has the potential to reach great lengths. An effective pitch must show the value of your business and why you need the support.
A government grant is a non-repayable financial award given by a specific level of government (e.g. local, provincial or federal). They can be difficult to find and acquire, but if you are successful you’ll essentially be given “free” money that you don’t have to pay back. Government grants are funded by tax dollars so they have strict application criteria and are closely reported on to ensure the funds are allocated properly. Do your research to find the grant that is right for your business plan.
The key lesson here is there are many options to fund growth. The first steps in figuring out which is best for your business is to look at where your business is now and what it is capable of becoming. Set goals for growth and don’t be discouraged if your first choice doesn’t work out because there is always another option.
Searching for finance can be a stressful experience. It is debt after all. If you are having trouble determining the best route for you, it may be in your best interests to hire a business consultant. With a vast array of business financing experience, I can help you determine which finance option best matches your current status and expansion goals. Contact me, David D’Silva and lets begin a project together.