How to Raise Capital Before Expanding Your Business
Note: Thank you to Andrew Rombach from Lendedu who provided these insights…
There are almost 30 million small businesses in the United States, and they employee around 48% of all workers. Many small business owners feel positive about the economy right now, which means they may be more likely to expand.
For example, the Spring 2019 Business Growth Index showed 59% of small business owners believe business conditions are good or excellent. 76% of business owners planning to hire in the next six months say they provide competitive or industry-leading salaries, and 51% say the new tax plan has been good for small business.
All of this can mean growth and expansion are in the works for many small business owners, but it’s not always that easy. They may have to find ways to raise capital to pave the way for that expansion, even with the added perks of continued growth.
Why You Would Consider Expanding Your Business?
There are plenty of valuable benefits to expanding a business. It allows you to expand your customer reach, diversify your assets, expand your products and services, and potentially increase your revenue.
There are different routes to expansion, including purchasing more inventory, developing a new product, opening a new location, or hiring more employees. Expansion can also mean investing in equipment or changes to your office.
Here are some indicators you might be ready to expand your business include:
- You’re outgrowing your current space
- You’re on track with a specific and detailed strategy for growth
- You’re exceeding the current milestones you set for your business
- You see the potential for growth within your industry as a whole
- You’re having a difficult time keeping up with demand
These are all beneficial for many businesses, but they are expensive as well.
Different Ways to Pay for An Expansion
Funding a business expansion can occur in different ways. Some businesses may also use a combination of the below methods to fund their expansion.
Relying on Your Profits
One option for expanding your business is to use your revenue if you are profiting substantially. You’ll have to plan ahead and carefully budget to set aside enough cash, but if you have high profit margins, this option can work well. You’re not putting yourself or your business in any more debt, and you don’t have to do the work of finding investors. This could be an ideal move, but there are some caveats.
Of course, this may not be an option if your business has slim profit margins. Not every business has the opportunity to raise capital by simply reinvesting cash reserves. Even if you do have the money, you may also wipe out your cash reserves, leaving yourself without a cushion if something unexpected occurs.
Try Securing Investors
Some people will turn to investors when they are starting or growing a business. Taking an investment means you don’t have to get a loan or rely on your own cash, which is a plus. If you have outside investors and your business fails, they’ve taken that risk, whereas with a loan you have to repay no matter what.
There are downsides to private investors, though. One big one is that you may have to give up some of the control of your business. Investors may be part of the decision-making moving forward, and at the very least, you’re going to be accountable to your investors for the decisions you make. Additionally, investors may expect a share of profits, which means you could be lowering your business’ profit margin. Additionally, you could give up part of your equity share.
Take Out a Small Business Loan
Getting a small business loan from either a bank or a government program can provide the capital needed. It still leaves you in control of your business, and you don’t have to worry about the strings that can come with private investors. Many small business loans are offered for the express purpose of an expansion, so there are lenders willing to approve successful businesses.
On the negative side, approval could be difficult for certain businesses depending on their credentials. Banks require great credit and promising financials for businesses to qualify a loan. Additionally, you are must pay the loan back plus interest – regardless of whether or not your expansion is profitable. Taking on more debt is always something you should carefully weigh.
Crowdfunding is a way to raise capital through P2P platforms where various participants contribute to a donation campaign. In short, you set up a campaign with a description, and if it takes off, you may have donors collectively contributing capital. The benefits include the ability to raise capital cheaply without having to trade equity or take out a loan. If you have a popular business and utilize social media effectively, this could be a viable option.
Of course, there are limitations to crowdfunding. It sounds easy to set up a campaign, but there’s no guarantee that it will take off. You may spend a lot of time setting up a campaign with little return. This happens often. It’s difficult to stand out as a business through crowdfunding.
Summing It Up
Expanding and growing a business can come with benefits—primarily, the opportunity to earn more revenue and become more successful. At the same time, it also carries risk and greater responsibility. You must consider whether or not the time is right to expand. If so, consider all possible routes to funding that expansion. There are pros and cons to any option, and one route to expansion may work well for one business, but not as well for another.
Andrew is a Content Associate for Lendedu – a website that helps consumers and small business owners with their finances.