As your business expands, your expenses may increase, requiring more financing. Funding for business growth is key.
First, consider these 5 general strategies for finding capital for business expansion. Then we’ll explore 10 specific growth financing options you can use to implement these strategies. Finally, we’ll cover some guidelines for determining which business financing opportunities work best for you.
5 Basic Business Growth Funding Options
From an accounting perspective, your financial planning is organized around your key financial statements, which record key information about your revenue, expenses, profits, assets, liabilities and cash flow. Thinking in these terms, you can organize strategies for financing business growth into a few major categories.
These include:
- Making growth more cost-efficient
- Financing growth from profits
- Attracting investors
- Converting assets into growth
- Finding financing
Making growth more cost-efficient focuses on reducing the expenses associated with your business expansion. The less it costs to build your business, the fewer additional funds you need.
Financing growth from profits focuses on leveraging your revenue growth. You can use your increased revenue and profits to fuel additional expansion.
Investors can inject cash flow into your company to provide you with resources beyond what you’re currently generating. This can help you expand farther and faster than you could on your own.
Converting your assets allows you to turn your own resources into cash for growth. Ways to convert assets into cash include collecting unpaid invoices and selling inventory and equipment.
Financing involves taking on debt liability to fund your growth. Financing resources include loans, lines of credit and credit cards, for example.
These methods are not mutually exclusive. You can use any one of them separately or any group of them in combination. Each has its pros, cons, best uses and best practices. Your financing strategy consists of a mix of methods you use.
10 Ways to Fund Business Growth
You can apply the general financing methods discussed above in many different ways. Here are 10 of the most effective approaches to put them into practice, along with some tips for each.
1. Pursue Cost-Efficient Growth Strategies
To reduce the cost of expansion, you can seek to improve efficiency in a number of key areas which affect your revenue and expenses.
These include:
- Marketing and sales, which directly drive revenue
- Customer service, which indirectly influences revenue by promoting customer satisfaction and retention
- Payroll, one of the largest expenses for many businesses
Strategies for improving efficiency in these areas include:
- Optimizing your business processes by testing what works and standardizing effective procedures (for example, you might test different marketing campaigns with different keywords to see which one attracts the most traffic to your website)
- Using technology to automate best practices (for instance, using chatbots to deliver quicker customer service)
- Outsourcing to improve efficiency while cutting costs (for example, using remote workers)
Using these methods to cut costs and increase efficiency will reduce the amount of funding you need to generate, enabling you to make maximum use of your financial resources. However, cutting costs in itself can only generate a limited amount of cash. If you need additional cash, you can combine this method with other strategies described here.
2. Allocate a Percentage of Profits to Growth
One source of funding your business plan should include is reinvesting your profits to finance growth. Using capital from profits offers both advantages and disadvantages. One of the biggest advantages of using retained profit for expansion is that you don’t incur debt. Using retained earnings as a source of finance means that you’re spending your own money.
However, when businesses invest funds to expand, a drawback is that profits are going back into the business instead of into the business owner’s bank accounts. Your business may be profitable, but you aren’t necessarily enjoying the fruits of those profits on a personal level.
A happy medium is to allocate a percentage of profits to business growth. Review your personal as well as your business financial planning to determine how much you need to earn from your business to achieve your personal goals and how much financing your business needs to grow. Use this information to help you decide how much profit to reinvest in growth.
3. Collect Payments Upfront
Waiting for payments your customers owe you can slow down your cash flow, slowing your growth in the process. If your business model allows it, one workaround for this is to collect some or all of your payments upfront.
For example, if you have regular clients, you might set up a monthly payment schedule where they pay you in advance. If you use a software subscription model, this can lend itself well to advance payments.
4. Collect Accounts Receivable
If you have customers who owe you money, another strategy for increasing your financial resources is to become more proactive about collecting outstanding balances. The first step is to establish a policy for late payments and communicate this to your customers. For example, you might set a grace period before a late fee becomes due.
Sending reminders as bills become due and after bills become past due can help you compel customers to pay more quickly. For accounts that become significantly past due, such as 90 days late, you might consider debt collection action.
5. Attract Investors
Finding investors can be challenging if you’re a smaller company, but if you’re expanding rapidly or you can demonstrate high growth potential, this can represent a way to accumulate capital without being restricted by your own resources.
If you’re trying to attract investors, start by making sure you have a good business plan outlining how you will grow your business. The SCORE business network can put you in touch with experienced mentors who can advise you on developing a plan which will appeal to investors.
6. Apply for a Loan
A loan to expand your business can be one of the quickest ways to acquire enough capital to sustain growth. Business loans come in a number of varieties. Short-term loans can provide you with working capital to seize immediate growth opportunities. Long-term loans can help pay for major investments such as real estate, building expansion and equipment. SBA loans provide funding with favorable rates for borrowers who may not qualify for other loans.
To qualify for most loans, you will need a good credit score along with an established business history and healthy revenue. Lay a foundation for obtaining a loan by taking steps to build a strong credit rating, such as paying bills on time, keeping credit balances low and increasing your company’s revenue.
7. Use a Line of Credit
A business line of credit provides you with access to a set amount of funds you can spend up to your designated limit, in return for interest payments and sometimes withdrawal fees. With many lines of credit, known as revolving lines of credit, money you repay becomes available to spend again. This can be useful for financing ongoing operational expenses as well as providing emergency funding for cash-flow crunches.
Qualifications for lines of credit are similar to those for loans. The stronger your credit, the larger amounts of funding and more favorable terms you are likely to qualify for.
8. Use a Business Credit Card
A business credit card works like a consumer credit card. However, business credit cards often come with incentives for purchasing business expenses, such as discounts on office supplies or travel. This makes them a useful financing resource for certain types of expenses.
Qualifying for a business credit card depends on having a good credit rating. However, if your credit rating is too low to qualify for the best cards, you may still be able to qualify for cards with lower limits, higher rates or lines secured by a deposit.
9. Sell Inventory, Equipment or Property
Selling assets can be another way to raise cash. If you have excess inventory, aging equipment or commercial property you don’t need, you may be able to sell it to help cover essential expenses.
Strategies for selling assets vary with what you’re selling. For example, you can sell inventory and equipment directly to other businesses or use resources such as surplus inventory liquidators. A real estate agent can help you sell commercial property.
10. Use Assets as Collateral
Another way to leverage assets is to use them as collateral for financing. Invoice financing, also known as accounts receivable financing, uses your unpaid invoices as collateral to advance you cash. Equipment financing allows you to buy or lease equipment, which itself serves as collateral.
Because these methods use assets as collateral, they can be easier to qualify for than other types of financing. They can work well for certain business models. For example, if your business relies heavily on extending customer credit, invoice financing can be a way to cover occasional cash-flow needs. If you rely on heavy machinery, equipment financing can be a cost-effective way to cover costs without tapping into other financial resources.
How Do You Decide Which Way to Fund Your Business Growth?
To determine which mix of methods you should use to finance your business expansion, consider a few key questions:
- What are your business growth goals, and how much additional funding would you need to achieve them?
- How far would cutting costs contribute to closing your funding gap?
- Are your current revenue and cash flow sufficient to fund your growth solely from your revenue?
- Is your credit score strong enough to qualify for a loan or line of credit?
- Do you have assets that can be converted into cash?
Your answers to these questions will help you eliminate options that don’t apply to you and focus on your best alternatives.
Choose the Right Growth Financing Strategy for Your Needs
General methods of financing business growth include cutting costs, reinvesting profits, attracting investors, converting assets and finding financing. Financing resources include loans, lines of credit, business credit cards, accounts receivable financing and equipment financing.
Which mix of strategies is right for you depends on variables such as how much you need to raise, your current cash flow, what assets you have and your ability to qualify for financing.
Knowing what types of financing you qualify for can help you select a smart growth strategy. If you’re considering financing, take a few minutes to fill out our free, no-obligation prequalifying application and we’ll let you know in minutes what options may be available to you.
