If your company is outgrowing its current location, it might be time to expand your business. Whether you add a new retail location or are pursuing a separate venture, your company could use a thorough pat-down before plunging into expansion. An inadequate plan or insufficient funding could be the downfall to your business, so we’ve compiled a list of tips to consider before financing an expansion.
Financing your Business Expansion
1. Make a list of pros and cons for expansion
Take an objective look at your current business model and make a list of pros and cons. Is it a viable process? Would expansion truly be the best financial decision for your company? Let’s say you currently operate a successful bakery. A new location may not necessarily perform as well as the current one, and the remodeling process may not pay itself off until a couple of years later. It is crucial to take all factors into consideration before making a decision.
In addition to making a pros and cons list, talk with a mentor or someone who has made similar decisions for their business. What were their past mistakes and successes? How would they plan for the process of expansion? By factoring in their valuable advice, you are able to make a more level-headed decision.
2. Forecast the cost
To figure out how much money is required, you need to make a lengthy forecast for all costs in the process. For the bakery mentioned before, this could involve leasing, renovations, staffing, training, and inventory costs. Conduct a break-even analysis to see how long you will need to finance the expansion before profitability.
For most businesses, this should be easy to calculate as you can base it on current costs, but keep in mind that there could be hidden costs. Also, current traffic and sales will most likely vary at this new location. Keep this forecast prepared when soliciting future lenders and investors for the financing process.
3. Double check your personal credit
Before you consider taking out a loan, double check to see that you have a good credit score. Pull your credit report for a reporting agency and check for any errors. It can take up to 30 business days to clear any errors, so do this in advance if you are looking for a loan in the near future. Those with poor credit scores will usually have higher interest rates or more trouble acquiring a loan. Keeping your credit score high can be a key component to a successful business expansion.
4. Research your loan options
You have several different loan options when financing your business. These typically include investors, debt-based financing, and occasional crowdfunding.
Investors include venture capital firms and angel investors. Typically, investors can be beneficial for growing small businesses due to their insight and experience in managing tremendous growth. However, working with an investor typically means sacrificing equity and complete control on how to run your business.
Crowdfunders are typically a less common route for financing, especially for businesses that are already established. For companies that need money for product development and production, a platform like Kickstarter could be a great way to finance your business. However, for service-based or already established companies, it could be difficult to gather a sufficient amount of funding.
Lastly, debt-based financing is the traditional route many small business owners tend to take. Banks and alternative lenders can offer short-term or longer loans for businesses, without sacrificing equity. For this process, a great credit score will most likely be necessary for attaining the best rates and amount needed. Loan types include SBA 504 loans, construction loans, and bridge loans. While SBA loans are typically for smaller businesses, larger companies should consider construction loans for building hotel franchises or office spaces. Bridge loans are typically short term loans for purchasing distressed properties or repositioning opportunities. Finding a loan type that suits your business is key, so do your research!
5. Choose the right lender
When looking for the right lender for your business, make sure to find a firm with the best APRs and reputation. Typically, you should look for:
- Clear eligibility requirements
- Timely response and quick application process
- Transparent website and a solid reputation
- Competitive APRs
- Flexible terms
- Required loan amount capability
Don’t compromise on too many of these terms! Otherwise, you might end up in a contract that will not best satisfy your expansion needs. Carefully research past transactions and previous experience when signing with a lender.
Follow the tips on this list and you’ll be prepared to finance your next business expansion!