A time comes when your thriving or growing business expands its operations, but to do so, you need sufficient capital. Such a move takes a lot of planning, but sometimes you need to make such decisions without thinking twice. Either way, it is essential to have expansion capital at your disposal.
Understanding Expansion Financing
When it comes to expansion financing, the term refers to any kind of activity about increasing the size of your business via capital investments and labor investments. Doing so not only increases the size of your business, but it increases sales and profits, too — as long you play your cards right.
Business owners feel more confident about expanding when they have the necessary infrastructure and systems in place to ensure the expansion takes place smoothly. Additionally, it does not hurt to make sure the business can sustain the high-growth phase, also if the customer base continues to rise to keep up with the long-term and upfront costs associated with the project.
Why Expand at All?
- For an Influx of Working Capital – When expanding operations, your liabilities outweigh your income, which is where quality work capital financing comes into play.
- To Invest in Marketing – Even if you have a great product or service, it’s pointless if people do not know about it. Invest in marketing to grow your business.
- To Purchase Inventory – While your business grows, you need to manage your inventory to keep your customers happy. That saves you from losing orders due to a lack of inventory.
- For New Equipment – A growing business needs full functioning and modern machinery and equipment to stay competitive and fulfill rising demand. Check out this site if you are interested in obtaining an equipment loan.
- For New Facilities – When a business outgrows its supporting networks and existing operating facilities, new facilities are a must.
- To Hire Employees – Quality workers are a must when it comes to supporting your business expansion. You also need new employees to aid the business with marketing and production.
How to determine if Expanding is worth it?
That is an essential question that businesses need to ask before investing a dime in expansion. If you are willing to spend money for business expansion, it is only logical to know whether it’s worth it or not. To find out, carry out proper cash-flow analysis and projections.
- Analysis – Click here to analyze and evaluate your business’ financials using a business loan calculator. Do not exclude expansion and marketing strategies to determine the opportunity for growth.
- Planning – Put together an execution plan on how the money will be used and what exactly you plan on expanding for your business’ growth.
When to Expand?
If you are wondering when the business expansion is a good idea, it is whenever you have a viable opportunity to grow your business in a way where your profits will be higher than the costs of expansion.
For instance, if your business sees an opportunity to speed up operations by hiring a new employee for increased efficiency, which may translate to an increase in sales, then it will be worth it. If your business would fare better in a bigger facility by increasing production, then it would be worth considering.
Expansion Financing Options
When it comes to expansion financing options, you have plenty of options to choose from. Each option has its own characteristics, not to mention its pros and cons. A particular type of financing option may be great for one kind of business, but it may not be great for a different kind of business entirely.
Without further ado, here are some prominent expansion financing options along with their pros and cons.
Out of all the options, getting a bank loan or line-of-credit is always a simple solution. The reason why it is simple is that it has the lowest possible rates. They also come with the best terms for businesses. By paying lower rates, your business can invest a lot more in your business during the expansion phase.
Rates: 5-8% Terms: 1-10 Years
Equipment financing makes it possible for businesses expanding to acquire new or used business equipment without having to pay the entire cost upfront. They do not buy the computer right away but instead would depend on an equipment leasing company to purchase the equipment for them, which would then be leased to them for a specific amount of time.
Rates: 5-15% Terms: 1-10 Years
Alternate Business Loans
By opting for this option, you will be able to get quality financing without the need for providing documentation and an exceptional credit score as required by traditional lenders. This form of financing is relatively fast, with pre-approval taking no more than a few minutes to acquire funding, which can be acquired in two weeks or less.
Rates: 8-25% Terms: 1-5Years
That is an excellent option for small businesses that want to expand without breaking their bank in the process. The rates are very affordable, while the terms are favorable – allowing small businesses to pay back whatever is owed with complete ease and comfort.
Rates: 6-8% Terms: 3-25 Years
Merchant Cash Advance
This financing option is a useful tool for businesses that need financing immediately. Cash advances may not be like loans in the traditional sense; they are instead acquired by selling future revenue to get immediate funding. The amount is either paid back daily, based on a percentage of the business’ credit card transactions, or weekly through ACH payments deducted from the company’s bank accounts, as stated by AC Waring and Associates INC.
Factor Rates: 1.16-1.50 Terms: 3-24 Months
Business Credit Cards
Business credit cards are more than just convenient payment methods; they are also powerful tools for businesses to manage cash flow, build their credit, and take advantage of rewards. Unlike personal credit cards, which are designed to help individuals manage their finances, business credit cards provide much more flexibility and tailored support for companies of all sizes.
When choosing the best business credit card to fit your company’s needs, it’s important to consider the features offered by different cards in order to find one that meets your specific requirements. Common features of business credit cards include rewards programs tailored specifically for businesses, low-interest rates that can help businesses save on interest expenses throughout the year, and sign-up bonuses that can provide an initial boost of savings for those new to using business-specific cards.
Reward programs vary widely from issuer to issuer and from card type to card type. Some popular types of rewards include point systems that allow companies to earn points or cash back as they purchase items with their card; airline or travel miles; discounts at certain merchants or across multiple merchant categories; and 0% introductory APRs. It is important to research thoroughly the features associated with a potential card before choosing one in order to make sure you’re getting the most value out of your decisions. Take note this card is only for business, and not for personal use. Daily Prosper offers more information regarding this topic.
Remember, business expansion is not for everyone. No matter how well you think your business is doing, it would help if you still did your homework to determine whether you can afford to expand your business.
The last thing you need to do is to get the financing required to expand your business, only to struggle to make ends meet shortly. There will be opportunities that require immediate action, but that does not mean you go in blind. It would help if you still put some thought into those decisions that are time-sensitive.
If you think you need professional help to make an informed decision, do it. Do not hesitate to cover all the bases to ensure you do not get in way over your head.
As for the type of funding you should opt for, that entirely depends on the type of business you own. As mentioned earlier, not every financing option is great for every business. You need to weigh the pros and cons along with the interest rates and terms to come to an accurate conclusion. All of this takes time, so do not be afraid to invest as much time as required to prevent potential disasters.