How do you find financing for business expansion, when the time is right? No matter how successful a business might be, the decision to proceed with expansion inevitably comes with more spending, not less, and therefore a need to identify funding sources early in the process.
Often, the single best solution is to obtain a small business expansion loan. Traditional lenders (such as a bank) will naturally want to know what you plan to spend the money on, in order to finance your growth plans.
Reasons for financing growth
Typical areas where business leaders focus their expansion efforts include the following:
Opening a new location.
A retail business with a bricks-and-mortar presence may wish to expand to a second or third location. For this and other related goals, it’s important to gauge the anticipated costs.
As Inc. notes, “you’ll need to acquire estimates for leasing space, building out your location, hiring staff and procuring additional inventory.” To make sure the numbers work, conduct a “break-even analysis to determine how long you’ll need to support your new venture before it becomes profitable.”
Hire additional staff.
Your current workforce might not match the needs of expansion. You’ll have to find time, money and other resources to recruit new team members (to pay them, once they’re hired). This is an important area to focus on, so that you and your workforce aren’t stretched too thin by your company’s “growing pains.”
Purchase new equipment.
Technology or other business-related equipment represents another area impacted by expansion. Whether it’s needed to facilitate greater employee productivity, respond to increased fulfillment and delivery demands or other needs, funding for equipment might be a key part of your expansion plans.
Other expansion-related areas include large-scale product upgrades or a new product launch and/or breaking into a new market. All of these objectives require new sources of financing.
Options for financing for business expansion
If attempting to secure a traditional bank loan isn’t your ideal financing strategy, consider these alternative funding options:
These stand-alone cash flow loans are fairly easy to qualify for, because requirements are less strict than for a bank loan. Also, it’s not necessary to secure the loan with future business revenue or other collateral. But stable revenue and a solid business plan are essential factors for approval.
The Small Business Administration doesn’t actually loan money, but they agree to back a certain percentage of the loan. They guarantee repayment to the lender, which in term facilitates loan approval. Many small businesses opt for this approach.
Purchase order financing.
These short-term loans cover up to 100% of supplier costs, as long as it’s determined a big order is just about to close. After the sale, the lender deducts their fees from the proceeds.
With this approach, you transfer over an unpaid invoice to a financing company (the “factor”), and receive an advance on payment. The factor takes over collecting payment from the clients. After deducting their fee (which can be as low as 1.5% of the invoice amount), you receive the rest of the invoice amount. Under this arrangement, you’re not obliged to wait 30-90 days for payment on your products or services.
Revenue based financing.
This type of loan involves a quick, simplified application process. Lenders approve financing after reviewing historic revenue and use this to forecast future cash flow. You receive a lump sum of cash. The lender collects a specified percentage of future sales, either on a daily or weekly basis.
Financing business expansion through crowdfunding has become more popular in recent years. Online platforms like Kickstarter enable interested micro-investors to put up funding for your expansion plans, with numbers that can significantly boost your chances for successful growth.
Repayment, or debt crowdfunding, follows a similar approach to traditional small business loans. Here, the business owes money back to the individual lenders at a set (agreed-upon) interest rate for these deals.
It’s worth exploring ways to secure venture capital financing, or enlisting the services of an angel investor to help grow your business. Some investors seek to play an active role in a business’s next steps. A business owner must relinquish some equity in order to obtain investor funding.
Financing business expansion can be stressful, but knowing you have options can lessen the anxiety involved. Your expansion plans may or may not meet traditional lending requirements, but with the range of lending alternatives available these days, a growing business is likely to find the financing it needs elsewhere.
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