How Much Funding Does a Small Business Need to Expand?

— September 28, 2018

Every small business owner needs to make it a point to learn about the process of growing their company, especially if it comes to a more complex variant of that such as expanding into a new market. One of the main questions that often come up when it comes to business expansion is about the amount of capital typically needed to ensure that things will flow smoothly. This is not an easy question to answer, admittedly, although there are various reference points you can consider.

Understanding Working Capital

Before you even dig into this field, you’ll need to develop a good understanding of the actual meaning of working capital. You’ll typically need to have a clear idea of your own company’s working capital during periods of rapid expansion, especially ones that require significant investments, like purchasing new supplies or even extending your offices to a new building.

Your working capital is simply defined as the total value of your assets, minus all liabilities you currently have. You should keep in mind that this specifically refers to the short-term needs of your business and not the long-term ones.

How Much Does Your Business Need?

There is no concrete answer to this question, as it’s a highly individual one for each company out there. To get a good idea of the working capital your business should ideally have, you should figure out several key points, mainly how fast you can liquidate your current assets, and how fast you can repay current outstanding liabilities with the resulting cash.

You should take a good look at your turnover rates, as they are going to play a major role in the necessary calculations. Don’t grow your sales without having a lot of funding set aside to deal with that growth!

How to Secure Extra Funding

You’ll generally try to build your working capital through your actual business operations – you accumulate some of the profits over time, reinvesting them into the company and improving its potential for the next cycle. Doing this steadily over time can usually result in predictable long-term growth, but not all businesses manage to secure enough funding in this manner to expand properly.

In that case, you’ll want to turn to the financial market for help, but don’t be surprised if a large number of lenders and other traditional venues for securing capital are unwilling to work with you if your company is still small. This can put you in a very difficult and potentially compromising situation if you don’t plan ahead correctly.

Alternative Funding Sources

There are some alternative sources that are commonly used to secure additional funding, and community lenders are a good example of that. These institutions are typically created to cater to the needs of small businesses that get ignored by traditional financing organizations and the banking industry, and they can be a very good starting point in your search. Just make sure that you can show that you have a good enough understanding of how your operations work and what your specific requirements are.

In general, as long as you plan ahead for the long term and know what alternative funding sources are available to you, you should never find yourself in a tricky situation where you don’t have enough capital to grow. It will take some time and patience to reach that state, and it will be especially difficult in the beginning, but once you’ve set things up properly, there’s little that can stand in the way of expanding your business and exploring new markets. Don’t try to cut any corners either – those who think that they are too smart to follow traditional business rules are usually the first ones out of the game.

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