Small business owners tend to be ambitious for growth, but this costs money and deciding on the best way to fund expansion requires careful planning. Here we take a look at the pros and cons of using savings versus raising external finance.
In all aspects of life, growth is associated with health, vitality and success – this is true in the business world as much as anywhere else.
For any small business owner growth aspirations will constitute a major component of the business plan. You might not be setting out to become the next Ford or Microsoft, but you are certain to want to see your turnover figures on an upward trajectory over those opening years.
How to fund business growth
Businesses grow in many ways.
It might be through expanding the range of products and services on offer, by scaling up production or by entering new markets. One thing that is common to all is that to make them happen, there is a need to plough in investment.
Using your capital
If your business has cash in the bank, you might think this is the obvious solution. Intuitively, it makes sense, but strategically it can often prove unhelpful to use up cash resources.
Resilient businesses are able to withstand unforeseen expenses or dips in revenue by holding reserves of cash. In contrast businesses that struggle have often used up cash resources on capital expenses or expansion and therefore come unstuck when an unexpected expense or tax bill crops up. Remember, cash flow is the number one killer of new businesses.
If you simply need to free up a little more cash in order to fund growth, invoice financing can be a neat solution for B2B businesses. It is a short-term credit facility, secured by outstanding invoices that are due within 30, 60 or 90 days, depending on your payment terms. As the credit limit is linked to the value of outstanding invoices invoice finance is the perfect solution to fund new contracts and expansion – as the level of invoices go up, so does the available credit.
For lenders, this is attractive as it is low-risk – when the customer pays, their debt will be repaid. This means they can afford to offer low fees, making this a highly affordable way of achieving a quick cash injection when you need it.
Some growth strategies need a more significant cash injection, for example if you need to invest in new assets, premises and infrastructure.
Business loans are individually geared towards the specific purpose and the repayments are directly linked to the useful life of the asset or project being funded. Therefore, using a business loan to fund capital expenditure or growth plans ensures that the business can benefit from the associated increase in sales or profitability ahead of incurring the entire cost of the initial investment.
BIZL is an online business finance comparison platform that helps businesses plan, borrow and grow.
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