Most businesses have ambitions to grow and, if you are planning to do so, you must do it in a carefully considered way that ensures a long-term favourable performance.
In order to grow effectively, you need the funding in place. Depending on the strategy you are following, there is likely to be investment involved, such as the new staff, purchasing equipment and assets or allowing changes to infrastructure and process. There is also likely to be a squeeze on your cash flow during the growth stages as a result. This all creates a financial gap in your business.
Fortunately, there are external options that can finance business growth. An expanding company is often seen as a successful one, as long as the strategy used is effective, making it easier to secure funding.
In this guide, we explore the various options for growth financing, including the unique characteristics of each and how they can support your expansion.
Lending
One of the most common ways to fund the scaling of your business is a commercial loan. Loans can be used for various reasons associated with growth, giving you scope to identify a solution that suits your requirements.
Other lending solutions include:
- Invoice discounting – supports businesses growing quickly by advancing the funds against their outstanding invoices
- Trade finance – allowing you to fund import and export to take advantage of global custom
- Leasing – asset finance is used to secure equipment for your business without requiring upfront investment
- Mortgages – used to acquire property, such as additional premises, typically with a 30% deposit required from the borrower
- Peer-to-peer (P2P) lending – an alternative to traditional bank lending involving lending via a platform from pooled monies from both institutional and private investors
How much you raise will be dependent on many factors, including the lender you work with, the perceived risk of your business, whether you have security to offer and how much you are looking to raise.
You will then make regular repayments until the balance owed is cleared, so it’s essential to meet the agreed repayment schedule to avoid falling into debt.
Due to the extensive amount of loans available, it’s important to research the market to find the one that is right for you. This includes comparing traditional lenders (such as banks) with alternative providers, who tend to be more open to risk and flexible. You may also want to compare different features, such as interest rates, terms and other fees, to find the most competitive and affordable option for your funding need.
You will need to apply for any loan you want. The application criteria can vary between lenders but will typically include financial statements about your business and its financial state, as well as why you need the loan. It’s vital to have a compelling reason for the loan, as this will make a lender more likely to accept you and confident that you will repay them on time.
Investment
For those who do not wish to undertake debt funding through a loan, seeking investors to support their growth is an alternative. With this route, you gain financing by offering shares in your company – which entitles those shareholders to dividends and influence on significant decisions.
If you pursue an investment, it can be a challenging process. You need to identify investors who suit your business and goals while successfully capturing their attention and convincing them that backing your company is a valuable idea. This typically means spending time networking, crafting a business plan and creating a solid pitch that demonstrates the rationale and potential of your expansion.
If your growth plan has proven value and is likely to result in increased success, it will be much easier to attract equity funding, as shareholders should see higher rates of return.
The benefit of investment is that you generally do not have any debt to repay, although investors can include an element of loan notes. However, you must be prepared to maintain a long-term relationship with the investor. You also need to understand the repercussions for your business – such as the dilution of share value, and what exit timeline the investors are looking for.
Grants
Grants are particularly desired because they are seen as ‘free’ money – funding you do not need to pay back or exchange for equity. However, they are highly sought after and often have specific criteria you need to meet.
If your business sits in a particular sector in demand or prioritised, innovation or your growth plans could have a broader impact, you may be able to find a grant. Examples include helping towards net-zero or sustainability goals, being actively involved in research or innovation, or looking to incorporate technology into your business. You can find more examples on the government website.
It’s also worth identifying support in your area, as some councils will have funding set aside to help SMEs grow and boost the local economy. Similarly, industry bodies or charities may offer grant funding if your business tackles a problem relevant to their cause.
If you can secure a grant, it will help support your expansion plans without the worry of repayments. However, grants will usually be provided for strict purposes, so you must make sure the funding is used only for those reasons. You can supplement it with other finance if required.
Crowdfunding
A popular alternative form of finance is crowdfunding. With crowdfunding, you appeal to people to contribute amounts of investment towards your business. If you are successful and hit or exceed your target on the funding platform, the investors will be pooled and an investment made in your business.
Crowdfunding comes in various forms, usually in return for their investment the funders receive equity or other incentives.
Succeeding on a crowdfunding platform is not easy, and if you want to succeed, your growth plans must be around filling a gap in demand, bringing a new product or service to the market or having a charitable or ethical element.
You will also need to create a compelling pitch that encourages people to part with their money. Sharing your crowdfunding campaign is key as is your marketing activities to help you reach more people and attract more funders.
Conclusion
Pursuing growth is a priority for many businesses, especially those who want to unlock improved profit and revenue. However, being able to fund it is one of the most significant barriers to overcome in your mission.
By understanding the growth finance options on the market and what works best for your company and its unique goals, you can cover the costs required to scale and make the changes you need to.
It will also help you to create a considered strategy that brings long-term success without overwhelming your finances in the present. This spells long-term success and irreversible growth.
When pursuing growth, it’s essential to obtain the finance you need to make your goals a reality. We can take you through the solutions for your business and help you build a strategy that elevates you to the next level.