A business that is in the initial phase of growth needs financing in order to cope with increasing demands for production. There are costs associated with business expansion: you need more raw material, new equipment, more delivery channels, and employees to carry out day to day operations. The cost of marketing and advertisement also goes up — all of these things require money.
Since your business is in its early stages, it may be unable to bear these expenses. Even if you try to burden your business with extra costs, your cash flow will become unmanageable.
That is why you need financing from other sources to manage your business growth.
There are several options available to owners who want to finance their growing business. The article below will discuss some of those options.
Banks and financial institutions are regarded as the most viable form of seeking investment for growing businesses. With the help of financing obtained through these institutions, a business is able to manage its cash flows and also finance growth activities.
Banks and financial institutions are good at gauging the financial strength of a company and have well-defined SOPs for approving loans and disbursing them. A new business or one that is in the initial stages of growth stands little chance of securing a traditional loan.
Moreover, these institutions would insist on having collateral against the disbursed loan that acts as security in case you fail to pay the loan.
If you are able to satisfy the bank officials with your financial records and provide them with a viable business plan, you may be able to secure financing from them in the form of short term loans, long term loans, and credit lines.
The mark-up rates on the financing options are predefined. The loan is repaid in equal regular installments along with accrued mark-up.
This is one of the most simple and sought-after financing options alongside accounts receivables loans.
Small Business Administration (SBA) Loan
Small Business Administration (SBA) Loans are a great option for financing a growing business. An SBA Loan is a commercial loan which follows SBA requirements and involves an SBA guarantee. Businesses that have other sources of financing available to them do not qualify for these loans. Moreover, a business applying for an SBA loan must also have a specific purpose that will eventually help in business development.
For example, a business with orders that are more than its current production capacity will easily qualify for an SBA Loan.
It can also be used for refinancing an expensive loan however, simply having a gut feeling about a particular venture will not qualify you for SBA.
Options Available Under SBA
There are several funding options available under this program and lll of these help out businesses and provide funding assistance for growth and expansion.
SBA offers direct loans. It provides the guidelines for lending, and provides guarantees to third party lenders thus, eliminating their risk. The most common SBA loan is known as the 7(a) loan. This program offers financing assistance to specific businesses like agriculture, fishing, and farms.
The microloan program caters to the needs of small businesses with short-term loans.
The real estate and equipment loan program provides help in equipment procurement and financing fixed assets for the business.
Equity financing involves sharing your business with others in return for cash. There are two important equity financing options: angel investment and venture capital.
However, the business owner must have a very concise and clear plan for offering return on investments to the investors and this return must also be given within a set time frame.
Angel investors or venture capitalists are actually high net worth people who are seeking safe and secure investment options. They are able to disburse large amounts of money within a very short span of time.
Equity funding can be best utilized when the business is eyeing growth opportunities through expansion in new markets, or through the introduction of a new product line.
For the seasoned businessman, crowdfunding is a relatively new phenomenon. The process is legal and has helped quite a few businesses during their start-up and growth phases.
As per law, investors can invest their money in any business that they deem fit. Crowdfunding becomes very useful for aspiring start-ups since they have great ideas, but no money.
There are many businessmen who do not qualify for traditional loans from banks and financial institutions for one reason or the other so they can opt for crowdfunding in order to obtain financing for their venture.
A business owner can seek out crowdfunding platforms over the internet. If they are able to satisfy these investors, they will finance business growth in return for an agreed share of the profit.
Like crowdfunding, this is also a relatively new financing method that is not known to many people.
This involves a large group of people with limited resources who pool their money into a single collective resource, and offer that to aspiring businessmen so that they are able to grow their business.
The investors who pool the required money usually ask for a piece of your business in the form of equity so that they can reap the benefits of their investment over a long-time period in the form of dividends. Alternatively, they may settle for agreed mark-up and principal repayment over an agreed amount of time.
Friends, Relatives and Loved Ones
We all have friends, family members and spouses who have saved some money for rainy days so you may request them to finance your business growth with their own money.
Obtaining finance from these people is very beneficial in many regards. First of all, you know these people personally. They know you too and would be more willing to believe in you.
Another great benefit is that all these people will need to invest their savings somewhere in order to get returns on these savings. If you are able to provide them with a viable option, they will be more willing to take their chances with you.
If you are fair in your dealings with your relatives, there is every chance that such an arrangement will become a two-way long-term beneficial relationship for everyone involved.
The Final Word
After successfully passing the start-up phase of the business, every business requires money in order to finance its growth. If that money is taken out of the business cash flow, it will have an adverse effect on the daily operations of the entity. That is why shrewd businessmen finance their growth with the help of money obtained through different channels specifically for this purpose.
Once you have secured a financing option, you will not be able to grow your business at a reasonable pace, but also be able to see further opportunities for growth.