In business, if you do not expand, you die. And in order to expand, you will need your finances, management, staff and customers all working together. For some businesses, financing can be a major impediment to growth. So is expanding your business with a loan a good approach? Here is how to decide—and other ways to fund your business expansion.
How do businesses benefit from loans?
Businesses benefit from loans for the very simple reason that, especially for newer business, profit can easily be outpaced by growth. What this basically means is that you will likely need capital to help your business grow. Enter: loans.
Usually, it does not matter if your company is making $500,000 per year or $5 million per year—most companies have goals they want to meet. Reaching one milestone only means that you will create a new, larger milestone. Getting there is expensive, requiring more financing amounts and more frequent cash injections.
But remember: just because your business is making more money, it does not always equate to overnight growth. Therefore, you will want to be more strategic about where you want to invest any loans that you receive.
Other ways to fund your business expansion
Invoice finance. A movement that is on the rise, invoice finance can help give you time to build your business without stressing over the finances. Invoice finance is when a service provider advances you the funds on invoices you have been billed, instead of you having to wait up to 120 days to get the payment for your invoice. This has the potential to improve your cashflow since, by closing the pay gap, your company gains instant access to the funds owing.
Online lending. Online lending services have the advantage of speeding up some providers’ processing applications to an hour and have therefore become a popular alternative to traditional business loans. Online lenders are expected to eventually work with over 70% of small businesses.
Family and friends. While this option can feel exceedingly personal, it can be an important, company-saving option. Generally, your family and friends will often be more than happy to help your business stay afloat—and even thrive. Plus, they will either charge you little interest or no interest at all (especially compared to more traditional lenders) and you will not have to fret over bank contracts. Everyone in this situation will be content as long as the lines of communication remain open.
Selling assets. Selling assets will be a good option for you if you have assets you are not utilizing. In that case, it is an easy way to raise some much-needed money to expand your business. Other high value assets, such as personal items like your vehicle, could also be included, depending on what your personal and financial situation looks like.
Angel investors. Angel investors can provide you with a lot of expertise in addition to capital. Yahoo, Costco, and Google are just a few prominent—and highly lucrative—companies that have benefited from angel investors. This type of investor can help you make decisions much faster and also encourage a more relaxed environment than traditional investors.
Is expanding debt a good idea for a company?
Expanding debt could be a good idea for your company since loans let you grow your business more quickly than having your company finance the build needed to increase sales, marketing, and production, i.e., bootstrapping. To decide whether obtaining a loan or bootstrapping is best for you and your business, you will first want to do a thorough cost accounting. In other words, calculate the cost to your company in inventory, equipment, new employees, overtime for current employees, and any other expenses you incur.
Compare those figures to the net income and gross income you will earn with the added sales. Next, calculate the size of the loan you will require to increase your business and then conduct research to select the optimal loan for your company’s growth (as well as the cost of the loan in payments per month).
Finally, subtract the net income from your loan payments to decide if you will make a profit. If there is a profit, you will need to figure out when the best time is to obtain your loan. These are essentially the steps required to decide whether expanding debt is the bet idea for your company or if you should bootstrap the growth.
