As your business starts to grow, you may find yourself in need of financing to support the growth. While revenues and profits are increasing with the growth, cash flow may be tight. If you operate a product-based business you will want to ensure that you have enough inventory on hand so that you keep growing without missing any sales. So what is the best way to finance business expansion? Keep reading to learn how to finance business expansion and what financing options for business expansion look like.
How to Finance Your Company Expansion for Growth
When you are considering an expansion of any size and you are hoping for growth, there are two main things you need to do. First, you need to prepare and plan for the expansion by creating a strategy and forecasting your finances. The second thing you need to do is to determine which method of financing is best for your business and then take the necessary steps to secure it. Let us take a look at the two main portions of the planning phase that should be completed before applying for any type of business financing.
- Create a strategy: One of the most important things to do before expanding your business and looking for financing to fund that expansion is to develop a strategic growth plan. A strategic growth plan is essentially a business plan that focuses on the strategies you need to implement and the goals you need to achieve in order to grow your business. Your goals should be realistic, specific, and time-sensitive. This strategy should also reinforce some of the basics of your company, for example, your business identity, the problem you are attempting to solve for consumers, how your business is the solution to this problem, who your customer is, and who your competitors are and how your business is different. From there you can identify your current market share, your current monthly revenues versus expenditures, etc. Based on your business identity and your current standings, what kind of goals do you want to create? Do you want to increase your market share? Facilitate a takeover of a competitor? Increase revenue by a certain percentage? These goals should also have deadlines. For example, a 15% increase of market share within 6-months and how the business plans to achieve this, might be something you may include in a strategic growth plan.
- Forecast your finances: A complete and thorough financial forecast may go a long way in convincing investors or lending institutions of your business’s viability. An accurate forecast will help you to identify how much financing you will need to fund your expansion goals. The forecast will also let lenders or investors know how you plan to allocate the funding once you have acquired it. This practice of showing where the money will go will not only be good to satisfy potential lenders or investors, but it may also help you manage your money better to get the most out of the influx of cash.
Once you have a complete strategic growth plan and a detailed financial forecast, you can then begin to explore what types of financing may be best for your business and your situation. This is a crucial time to weigh all the options and to make sure you are making sound financial decisions.
How to Fund Your Business
When you are ready to fund your business and its expansion, you may become a little overwhelmed with all the options available to you. There are traditional-style term business loans, SBA loans, venture capitalists, angel investors, financing from friends and family, and inventory financing through Kickfurther. Let us take a look at some of these options and more in greater detail.
- Traditional loans: You may want to consider a traditional-style term loan from a bank or an online lender if you want to get a small business loan that can be paid off through monthly payments. This may be a good option for you if your business already has a proven track record of successful operation and if your business has a good credit score. If your business does not have a credit score yet, you can still use your personal credit score to receive a loan.
- SBA-backed loans: SBA loans are loans that are backed by the federal government but issued through private lenders. You can apply for an SBA loan at most banks, credit unions, and online lenders. There are several types of SBA loans depending on your business structure and needs. There is the SBA 7(a) loan, the SBA Express loan, SBA 504 loan, SBA Microloan, and the SBA Disaster loan. There are also a few less common SBA loan types that only apply to very specific situations. SBA loans typically contain lower interest rates and longer payback periods than traditional term loans.
- Venture capitalists or angel investors: Seeking funding from a venture capitalist firm or an angel investor may be a wise decision for some companies looking to expand. It is important to fully understand the terms of any agreement entered into with a venture capitalist or angel investor as sometimes they can expect a larger share of the return or some control of the company in exchange for their upfront investment.
- Personal loan: Some small business owners start by using a personal loan to fund their startup at first. Depending on your credit score, personal loans may be an option to acquire up to $100,000 for up to 12-years. Be wary of using a personal loan to finance a startup because you may be able to find much better interest rates through an SBA loan or other financing options. However, they can be a good option to increase cash on hand.
- Equipment loans: Equipment loans may be an excellent option for someone who may be looking to make large investments in vehicles, machinery, or any other type of equipment that is deemed instrumental to the overall operation of your business. Equipment loans use the equipment being purchased as collateral to secure the loan which can sometimes make interest rates much lower than term loans.
- Invoice factoring: If you have large billings but need cash now, you could consider invoice factoring. Essentially you are selling your unpaid invoices to a 3rd party company who will then give you an upfront payment of somewhere between 70% and 90% of the total amount due. Once the invoice is paid in full, you get the remainder of the invoice amount minus the fees the company charges for their invoice factoring services.
- Friends and family: A common practice for some startups is for business owners to receive loans from friends or family when they are first starting off. Make sure you are honest and upfront about when you can start to make payments on the loan and be sure to incentivize the loan by paying them some interest in return. Be careful going with this route of financing because bad business dealings between friends and family can have long-lasting interpersonal effects.
- Small business grants: By doing a little research you can quickly discover that there are thousands of grants available through the federal government, private businesses, and non-profit organizations that are intended to help small business owners expand their operations or help them become established. Each grant may have its own specific requirements for qualifying and you may want to consider hiring a professional grant writer to help with drafting the grant proposals.
- Kickfurther (for inventory financing): Inventory financing is another great way to get the funds you need to make investments in inventory purchases or for launching a new product.
Aside from this detailed list of small business financing options available, you should know that there still exist many options not mentioned here. When you have a strategic growth plan and a thorough financial forecast in hand, you are then ready to begin to review all the different financing options available to you to fund your business’s expansion. This is a critical step of the process and it is important to spend an adequate amount of time to ultimately determine which avenue is the best for you and your business.
How Kickfurther can help
While we mentioned several ways above to fund your business, you might just need inventory financing. If this is the case, some of the options above may work but you may want a more affordable solution. For companies that need inventory financing, Kickfurther can help. Kickfurther is the world’s first online inventory financing platform that enables companies to access funds that they are unable to acquire through traditional sources. We connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. This alleviates the cash-flow pinch that lenders can cause without customized repayment schedules, allowing your brand to scale quickly without impeding your ability to maintain inventory or financial flexibility.