Funding Growth: The Basics of Expansion Financing
Are you a small business owner looking to build a new storefront, diversify product offerings, conquer a wider geographical market, hire more employees, or pursue some other major growth goal?
Chances are, you’ll need some extra working capital. Not sure where to start? Let’s look at how to assess your expansion financing needs, compare funding options, and prepare for success.
How Much Do You Need?
To determine how much expansion financing you should go after, you’ll want to create an expansion budget that lays out expected costs, projected revenue, and a plan for repayment. You don’t want to borrow so little that your essential expenses aren’t covered, but you don’t want to borrow so much that your total debt load becomes unmanageable.
You can begin by identifying major expense types. For example, if you’re planning to open a second retail location, you can create high-order categories like facility, inventory, and labor, and then start itemizing individual fixed and variable costs within each type.
Your next step is forecasting the additional revenue that you expect to generate as a result of your expansion. Because some level of uncertainty is involved in any business expansion, some experts recommend running three forecasts – one pessimistic, one optimistic, and one in between.
When it comes to debt loads, no hard-and-fast rules apply in terms of what is best for your business, but some financial analysts recommend that small businesses maintain a debt-to-income ratio under 36%. Banks will also consider debt to income ratios as part of the underwriting process with varying levels of acceptable thresholds.
5 Ways to Fund Growth
Some entrepreneurs can tap into personal assets or internally generated funds to access the working capital they need. But for most, some type of lending or outside investment is essential. Here are a few options to consider:
- Term loans: A staple of most financial institutions and the most common form of medium- to long-term business lending, term loans provide a lump sum upfront that’s repayable in fixed monthly installments. They can be a good choice if you have a single, sizeable initiative in mind.
- Lines of credit: Similar to credit cards, these allow you to withdraw smaller amounts as needed, up to a set credit limit, over a specified period of time. This is a more flexible option that works well for ongoing or occasional projects like renovations or seasonal product lines.
- Crowdfunding: An increasingly popular way to raise capital, especially for new products, crowdfunding leverages the power of your social networks to finance your venture and can also serve as an effective marketing tool. Typically, supporters receive non-cash rewards, although debt-based and equity-based models also exist. Specific crowdfunding platforms have specific restrictions on use. Do your research first.
- Angel investors: If you have an out-of-the-ordinary growth strategy and a persuasive pitch, you may be able to attract the attention of high-net-worth individuals who are willing to invest their own money – and often their invaluable expertise – in exchange for ownership equity or convertible debt.
- SBA loans: The U.S. Small Business Administration offers several different loan programs through participating financial institutions. These funds can be used for a broad range of growth objectives but often have strict underwriting requirements as well as extensive paperwork.
5 Tips for Getting Ready
Pursuing expansion financing can be a complex process, so it’s important to clarify your goals, do your homework, and get organized. Here are a few basic steps to follow:
- Create a business plan: Most lenders and investors love to see a thoughtfully crafted explanation of your enterprise, its market position, and your plans for growth. Just as important: it’s a valuable exercise for busy entrepreneurs – who are often caught up in day-to-day details – to take stock of where they are and where they want to go.
- Clean up your finances: Whether you do your own bookkeeping or use an accountant, it’s vital to have your financial statements in order so lenders can easily and accurately assess your business’s cash flow and other key performance metrics. Since your personal and business credit history are also major factors, it’s a good idea to request reports and scan them for errors or adverse factors that you can address.
- Understand lender requirements: The most common reasons that small business owners are turned down for expansion funding include not enough time in operation, an industry that’s considered too risky, and funding needs that are too small. Before you invest a lot of time into developing an application or pitch, ensure that the funding source will work with businesses of your age, type, and size.
- Prepare your documents: A lack of preparation can also harm your chances of timely approval. In addition to your business plan, make sure to gather and organize your financial statements, personal and business credit reports, tax returns and bank statements, licenses and permits, leases and contracts, and any other paperwork that might be needed.
- Keep communicating: When you initially meet with lenders and investors, it’s essential to be clear and specific about how you will use funding to meet your growth goals and generate revenue. It’s also important to continue that dialogue once you’ve secured funding. By establishing and maintaining a good rapport, you can take advantage of insights and advice, build trust, and work through any problems that may arise.
Before You Expand
Reach out to ENB to explore all the expansion financing options available to you.