By its very nature, a successful business needs to expand to meet the demands of a growing customer base. Delivering at extra capacity presents a conundrum for many businesses, how do they unlock the funds needed to push to the next level? This article will explain business expansion finance.
We will look at the different options to finance business expansion, why you might consider them and their pros and cons.
Short term business expansion finance
If you need smaller amounts and quickly, the easiest options would be to invest your own funds or take a loan from a family member. This is risky because of the personal aspect of borrowing and not being successful in your expansion.
Another short-term funding option is to introduce or expand your bank overdraft facility to provide you with a financial buffer zone as you push your business forward. Overdrafts are usually subject to large interest charges and are repayable on demand should the bank request that. This is usually used by businesses that need to access some additional funds while their cashflow is stretched, knowing that the situation will improve soon.
There are also many government-run and other business grants available aimed at preventing businesses getting into debt and allowing them to expand to improve the local economy. They tend to be aimed at start-ups and not SMEs starting to see success and involve a lot of red tape and bureaucracy to secure the finds.
These short-term finance options come with risks and many companies looking for robust expansion often look for more long term and formal forms of business finance.
Long term business expansion finance
Growing success in business often leaves business owners at a crossroads. Do they continue at the same level or take the plunge and expand the business using a large amount of outside capital? If the second option appeals, the finance market has many options tailored specifically to business expansion.
Many people seem to have a natural aversion to taking out loans, but they are one of the most viable, secure and affordable options. These loans are great for sharp influxes of cash for things like moving to bigger premises, purchasing new equipment and hiring new staff.
Repayment terms and interest rates vary from lender to lender, and the deal you can acquire will depend on your company credit rating and your assets. Of course, the risks of non-payment of these loan payments will have large negative repercussions for your business and its operations.
- Equity release
Also known as “cash-outs”, the common theme of equity release is owners unlocking a portion of the company’s value by “extracting liquidity” (that’s cash in layman’s terms) while retaining business ownership. Releasing this equity will open up funds to expand the business. The complexities of equity release can be explained to you by an experienced finance broker.
Business Angels / Venture Capital
If you have a solid business plan for expansion, approaching experienced backers to invest could give you everything you need in terms of funds and also additional expert input. The Business Angels/Venture Capital investors will require a share of the company and a say in the direction of the business but can also provide new ways of doing things that may have been overlooked.
If your business expansion is more focused, needing specific equipment or assets there is a range of asset finance options to meet your needs in areas like machinery finance, commercial mortgage finance and IT and sales aid finance.
Flexible options like hire purchase, operating leases and finance leases mean that you will be able to find an affordable finance option to acquire the assets you need.
If you know why and how you need to expand but have little idea on what the best funding route if for you it is worth speaking to an experienced business finance broker to guide you plans and find you the best deals.