It is important to evaluate whether you want to consolidate your business’ position or find ways to grow. If you decide that your priority is growth then you need to plan carefully if you are to succeed. Growth has its risks, but the right strategy and finance options can deliver stability, security and long-term profits. Once you’ve assessed the current strengths, weaknesses, opportunities and threats to your business and how well it’s equipped to handle them, you can move on to the next stage – financing a business strategy for growth.
Financing Your Growth Strategy
Sound financial planning is the foundation of any growth strategy. Firstly, you should establish:
- how much investment is required to fund the venture
- when it will be needed
- when it will be available
A detailed cash flow forecast is essential, because your outgoings are almost certainly going to rise sooner and faster than revenues. Enough money must be in the pot to keep the core business running. It’s a good idea to build in some surplus too, as most projects take longer to bear fruit than originally predicted.
Detailed forecasts regarding sales, working capital and sources of funding, and even second round funding, need to be drawn up.
Businesses looking for capital investment, apart from bank loans, have three main sources – equity capital provided by the owner(s) or friends and family, venture capital and business angels. You can also see if any development or enterprise grants or loans are available in your area.
Equity finance – is money invested in a business that is not directly repayable. It could be your own, most likely raised through re-mortgaging a property, or money from others taking a share in the ownership of the business.
Venture capital – is investment by a fund in a business in the early stages of development. The deal will very often include a right to management involvement.
Business angels – are private investors taking a minority or majority stake in a business, often contributing valuable business experience in the form of advice and contacts.
Applying for a Bank Loan
If you choose to apply for a loan, you’ll generally need two years business financials and tax returns (for an existing business), a strong business plan and financial projections (for a new business) will add value. Your lender is looking for evidence that you’ll be able to pay off your loan, so the more detail you can provide, the better.
If you’re applying for a business line of credit, business loan or overdraft, you’ll also need security, usually in the form residential or commercial property. The type and quality of the security can lower the risk to the lender, and impact on your interest rate.
How to use business lending to grow your business
1. Avoid buying long-term assets out of short-term cash flow, or you could starve your business of the cash it needs to keep running from day to day.
2. Match the life of each loan to the asset it funds, so that you can pay it off from the extra revenue that asset produces. Don’t be tempted to reduce your repayments by opting for a longer term, or you could find yourself still paying for an asset long after its useful life is over.
3. If you’re upgrading your equipment, consider Asset Finance. It helps you customise your repayments to match your cash flow — and it can be very tax effective.
So when you are looking for the right kind of funding to assist your business growth be sure that your business is on the right track and extra funding is the right approach. You need to be certain that your business strategy is sound before you commit more money to it.
If you need more advice about business or home finance arrange a free, no obligation chat with 1300HomeLoan today!