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Is
it the Right Time to Finance Growth? Knowing
when to finance growth can sometimes be a challenge for many small
business owners. For most businesses, growth is an option not a survival
factor—albeit usually a very attractive option. Some business owners
take a very aggressive approach to growing their businesses; while
others take a very conservative, slow growth, approach. Regardless of
the approach you take with your business, how do you know when it’s
time to grow and how do you know if borrowing capital to finance growth
is a good idea? Although
there are successful companies that don’t aggressively pursue growth,
many small business owners want to see their businesses grow quickly.
With that in mind, here are some tell-tail signs it might be time to
grow: 1.
Your
market is growing: A
market on the rise can be a good opportunity to expand. For example, if
you’re a plumbing contractor and home construction is growing, it
might be time to add another plumber or two to meet the potential
increase in demand. 2.
You
find a complementary product that can boost profits: Sometimes
opportunities for growth come in the form of related products you can
add to those you already offer. A florist, for example, might find a new
line of candy or chocolates they can offer; or you might hire an ice
sculptor for weddings and events where flowers usually play a big part. 3.
Your
current customers want to buy more: Increasing
capacity to accommodate your customers’ desire to buy more is a
challenge most business owners want to face. This could also be the
result of an influx of new customers who want to purchase your products
or services and you need to expand to meet the extra demand. 4.
You
need more room: Sometimes
growing out of your current space is a good reason to expand. As your
business grows, customers increase, and you need more inventory,
expanding your location or moving into a new one encourages growth. Market
factors like those mentioned above are reasons many small business
owners consider expanding, but how do you know if it’s worth the risk
of financing that growth? If the following describes your business,
financing growth with a loan might make sense: 1.
You
currently have a healthy business with a positive cash flow: Borrowing
money to grow is a lot easier (and certainly makes more sense) if you
have a healthy business. A lender wants to know you have the means to
make the periodic payments associated with a loan to facilitate growth
and the cost of borrowing capital needs to be considered before you
talk to a lender. 2.
You
have a clear vision and a detailed plan for how you will spend the extra
capital to facilitate growth: Borrowing
money is a serious step that shouldn’t be taken with a
“seat-of-the-pants” approach. Make sure you’ve given thought to
how you will use the borrowed capital to help your business grow. Do you
have a projected ROI for the investment of borrowed capital; do you know
exactly how much you’ll need? The better you can answer these
questions, the more likely the borrowed capital will do what you want it
to and the more likely a lender will be willing to offer you a loan. 3.
You
have systems in place to handle the additional business: Talking
about growth and being ready for it are sometimes two different things.
If you’re not sure how you will handle the additional business, it
might not be a good idea to take on the burden of debt to facilitate it.
If you have a plan and a process in place that will successfully
accommodate growth, and all you lack is capital, you’ll be in a better
place to leverage borrowed capital to fuel growth. 4.
The
finances make sense: Popular
culture would have you believe that all you need is capital to grow;
however before borrowing, it’s important to make sure the economics of
the loan make sense. Does the cost of the loan make sense with the
anticipated ROI of the growth project, can you make the periodic
payments, do you have a contingency plan should things not go as
expected? These are all questions you should answer before you apply for
a loan to finance growth. While many companies fail because they fail to grow enough, there are also companies that fail because they try to grow too fast or try to grow at the wrong time. Recognizing growth opportunities is an important part of owning a small business and knowing when it makes sense to access borrowed capital to facilitate growth is a critical part of building a successful business. |
