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Expanding your business: what are your funding options?

From small business loans, to overdrafts and commercial mortgages – there are plenty of funding options available for businesses seeking to finance their expansion. Take the time to research your options and identify the best form of growth finance for your company.

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If you’ve decided that it’s time to start investing in growing your business, then there is a wealth of funding options available to you. We’ll look at various finance choices in more detail to help you navigate through this exciting but challenging time.

Planning your business expansion

Providing your business is scalable and successful (and you have the motivation to go for it), growth and expansion is an obvious development for many small business owners. However, finding funding can be a major hurdle at this point in your business’ lifecycle.

Remember, there really is no ‘one size fits all’ solution to finding finance for business expansion

At first glance, funding can seem daunting but there are, in fact, numerous funding options available to small business owners. Remember, there really is no ‘one size fits all’ solution to finding finance for business expansion so it’s up to you to do your research to form a clear idea of the choices available.

Before seeking a business loan, consider revisiting your business plan to incorporate your growth strategy. This will ensure that you have thoroughly thought through your growth ambitions and your intended expansion method.

Yes it’s a pretty big task, but do it at this early stage and your funding requirements will be much clearer and you can start to make decisions on the best way forward for your business.

What are the funding options available?

Seeking advice from a financial expert when looking into growth financing is a wise move. Expansion itself can lead to some cash flow problems and an expert will be able to advise you on the level at which your business can afford to take on debt, for example. That said there’s a lot you should pick up on yourself too.

Small business loans

A visit to your bank is the first instinct for many business owners looking for funding. It might be that you obtained a great business loan from your bank some years back and that you can now visit them once more with your updated business plan and ask them for a further cash injection to help your business reach its potential.

Banks are most likely to finance your expansion if it is clear that your business is scalable and you can prove that the financials add up. They will want to see clearly, within your business plan, how you expect to be able to repay the loan.

You might also get a better deal from a bank if you can provide some security against the loan amount. If you are struggling to offer security, consider looking into the Enterprise Finance Guarantee scheme, a government initiative that helps small businesses to secure loans from a list of banking lenders.

Business loans from banks are generally repaid on fixed terms over a pre-agreed period of time.

Bank overdrafts

An overdraft on your business bank account may go some way to help you fund growth, but the funds available will be limited. If you just need a cash flow buffer, this is an option worth putting on the table, but if you need a sizeable amount of cash to fund your expansion you might find a better deal from a secured business loan.

Invoice financing

Invoice financing comes in several different forms, but all involve a business ‘selling’ their unpaid invoices to a lender who will usually make the value of the invoices available to the business for a percentage cut and sometimes a fee.

Invoice financing can be a useful funding tool to help small business through periods of poor cash flow. However, it comes at a price and the money freed up through invoice financing may not be sufficient for longer-term, more ambitious expansion plans.

Asset financing

If your expansion plans involve buying a new piece of machinery or equipment to increase production and meet growing demand, then asset financing could be a great funding option for your business. The hire purchase and leasing models of asset financing packages means that you can spread the cost of a large purchase to ensure the investment doesn’t leave you with cash flow problems.

Using asset financing to help fund a considerable purchase, thus freeing up cash to spend on growth, is another way in which this method of funding can help you scale your business. However, you will find that leasing an asset will cost you more in the long-run than buying it outright. You will also lose the asset if you fail to make payments. As with all business finance, it’s a matter of balancing your options.

Commercial mortgages

A commercial mortgage can be used to help you to extend an existing business premises or buy new business premises that will enable you to expand your operations.

Funding expansion with a secured loan like a commercial mortgage will generally carry far lower interest rates than an unsecured business loan would. In addition you can repay the money over a longer period of time.

On the other hand, you’ll have to put down a sizeable deposit, which means tying up cash that you would otherwise have to hand. Don’t forget there is also the risk of repossession should you fail to keep up with your repayments.

Angel investment

If your business has high growth potential and you can demonstrate this, you may be able to secure funding from a wealthy individual (or individuals) keen to support a smaller business while making a tidy return. If you can't find one yourself, there are many angel investor networks online that match UK businesses up with potential investors.

Investment from friends and family

Some businesses don't have to look to far for funding their expansion as friends and relatives with money to invest may be keen to help out. Although your loved ones may be keen to invest in your business’ future they should only ever invest what they can afford to lose.

Preparing for your business loan application

When applying for any level of funding from lenders, it’s vital that your own finances are healthy and that your record keeping is impeccable. Lenders will want to see how you are going to spend their cash and how and when they will see a return on their investment.

Key questions to ask before you apply for a business loan

  • How much do you need to borrow?
  • What do you need the money for?
  • Can you afford repayments?
  • Can you put down security against the finance?
  • Can your business deal with the risk?
  • Can you afford to take on debt?
  • Will you still have cash to hand when you factor in your repayments?

Above all, do your research. There are a lot of options out there for businesses wanting to invest in growth, but making the right choice is down to you. Luckily there are plenty of online tools to help you to consider each option objectively and help your business reach its full potential.

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