Your business is growing to the point where you need to expand your manufacturing facilities, distribution capabilities or staff. There’s just one problem: expansion costs money you don’t have; business expansion requires business finance.
How do you finance growth without spending more than you might make?
The Business Expansion Plan
Investors emphasize the importance of a realistic game plan for any expansion. Business Partners Ltd., an investment firm in South Africa, suggests developing a roadmap for the next two to five years that outlines:
- Current and projected demand for products/services
- Required capabilities to meet projected demand
- Potential competition
- Effects of expansion on cash flow
- How expansion can reduce cost-of-sales
- Minimum funding requirements to execute expansion
- Expected sales or revenue increase from expansion
Use a Credit Line to Finance Expansion
Angel investor Barbara Corcoran recommends getting a credit line, even before you actually need it, in this video from Forbes. Why? Because credit lines are hard to get. According to technology entrepreneur Scott Allen, banks are wary of businesses that use credit lines to manage cash flow problems, like the crunch that can happen during expansion before increased sales match increased costs. But the banks can’t tell you how to use the credit line once they’ve approved you for one. Allen notes that the bank requires:
- Some form of repayment guarantee that may require owners to provide personal collateral.
- Cash flow statements, balance sheets, income statements and other financial documents that follow standard accounting practices.
- Some demonstration (such as the above game plan) of your ability to pay back loaned money.
Traditional Financing for Growth
Banks are in the business of lending money, so even if you don’t get a line of credit, there are other types of bank loans to pursue. You can also apply for Small Business Administration Loans, and there are several federal and state grants designed to assist businesses in order to help spur local economic development and growth.
Crowdfunding sites Kickstarter and Indiegogo have gained a lot of attention as a way to raise capital. You make your pitch and hope enough people are interested to collectively raise the funds you need. As Tim Chen at Forbes points out, if you don’t hit your stated goal, some crowdfunding sites allow you to keep whatever funds you’ve raised, while others do not. Also, the cost is high — as much as 10 percent of total funds raised are siphoned-off by facilitators.
Finance with Personal Savings
You could also dip into personal savings, withdraw from your 401K account, take out a personal loan or cash out other assets. The problem with that, of course, is the high risk that if your expansion fails, your savings is gone. Many businesses have been started with personal credit cards, but with interest rates as high as 29%, this is probably the most expensive way short of loansharking to finance a business expansion.Business & Finance Articles on Business 2 Community