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Business growth often requires capital beyond what the business can generate in its current position. For example, buying inventory and hiring a team can consume a lot of resources before you start to see a payback.
Fortunately, when it comes to financing your business growth, many different options are available. But because the options are plentiful, it can be tough to decide which one is best for you and your business.
Looking at all the different types of financing available is essential to making an informed decision. There are private sources of finance, like friends and family or digging into your savings, and debt financing options like business expansion loans or lines of credit. Finally, raising external capital for expansion through selling company equity to investors can also be an option for your business.
Let’s look at the commonly available options for financing expansion or securing funding to purchase an existing business.
Although financing business expenses from your personal savings may feel like the most straightforward option in the moment, doing so requires careful consideration. Considering that you could lose your savings if the expansion doesn’t go well, this may be the riskiest funding source.
Your overall financial position will be the deciding factor. Investing 95% of your life savings may not be wise, but a high-net-worth individual may reasonably decide to risk a small amount of personal savings on an expansion investment.
Aside from financing expansion through personal savings, entrepreneurs often turn to people they know, the so-called Friends and Family option.
There may be a formal agreement in place that you’ll pay them back with a predefined interest rate or grant the investor a percentage of the company. Or, maybe there’s simply an informal understanding that you’ll pay it back.
You should, however, be clear about how much you’re asking for and what the terms are before starting down this path. Understand that your relationship may change once you’ve mixed business with personal.
Another option is to finance business growth from within the company, usually referred to as “bootstrapping.” This method’s drawback is that it’s not a way to generate quick cash, and it could involve delaying expansion plans until you’ve saved up enough money.
This can be challenging if you have shareholders expecting growth, but you’ll avoid paying interest or changing the company’s capital structure.
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One of the most common ways businesses finance their growth is through bank loans and other lines of credit. This financing usually comes with relatively low interest rates, making it an attractive option for many businesses.
The downside is that collateral may be necessary to secure the business expansion loan, like your home or business assets, depending on your investor loan source. If you can’t make the payments, you may lose your collateral.
Further, securing certain types of loans may require a minimum stable cash flow, robust growth plans, and strong credit history.
These are revolving loans, much like credit cards, and may be secured by collateral but don’t need to be. There are limits on the amount your business can borrow, and interest typically accumulates once you use the money. You may also pay an annual fee to access the credit line.
However, line-of-credit loans have the advantage that the credit is available again once the balance has been paid.
This traditional type of financing is most similar to a home mortgage. Installment loans are typically repaid with equal monthly payments (with interest) over the loan term. The repayment schedule is set when you take out the loan and doesn’t change from then on.
Trade credit is extended to business customers by their suppliers in payment terms. Customers can purchase goods and services and pay for them later, usually within 30 days. This financing is helpful for working capital but may not help you finance expansion, especially if you need to give your customers trade credit.
If you decide to finance your business growth through bank loans or other lines of credit, shop around for the best rates and terms.
Another way to finance business growth is by selling company equity to investors. This means finding investors willing to put money into your company in exchange for a stake in the business.
Raising capital can be a good option for financing expansion without taking on debt, and it can come with the extra benefit of additional industry expertise and resources if you partner with the right investor.
This type of financing can be challenging to obtain, and you’ll likely need to give up some control of your company. But it can be a good option if you need a large amount of capital and don’t want to take on debt. Angel investors often bring expertise to the table and can help with strategic advice.
An IPO is when a company sells shares of itself to the public. Taking a company public is a big deal and can be an excellent way to raise a lot of money, but it also brings challenges.
An early-stage company may not be a good candidate for an IPO, as potential shareholders may require strong growth and solid company fundamentals. Additionally, there are listing requirements from the SEC and an underwriting phase to determine the price of shares.
This is when a firm invests money in a company in exchange for equity. It can be a good option if you need large amounts of capital and are willing to give up some control of your company.
Private equity firms often bring more than just money. On top of providing capital for expansion, their expertise and experience with other companies can be valuable for guiding you through strategic challenges.
Financing business expansions can be complex. With all the options available, it can be hard to decide how to secure the funding to purchase an existing business or capital for expansion. But with careful planning and execution, it can also be a great way to grow your business. Choose the best option for your needs and goals and work hard to ensure the expansion is successful.