It’s a good feeling to see the company you’ve put your heart and soul into succeed. Nearly all business owners start out small with dreams of expanding over time to meet customer demands for their products or services. Perhaps you’re in the position where it’s time to look for more space, additional hires, or a new piece of equipment to produce your next “big thing.”
Growth is good, but many small business owners aren’t sure what steps to take to move beyond their current structure, especially when it comes to financing. Here are five considerations to help you be successful when mapping out your business growth strategy.
Evaluate Your Business
Take a hard look at your company and determine what growth should look like for you. Do you need to buy inventory to fulfill an order? Do you need additional staff to allow for more production and increased sales? Or would a more efficient piece of equipment be a better solution? If your company grows quickly, how much do you have to spend (materials and labor), and for how long before you get paid? Often new equipment can result in additional revenue, more production hours and help a company win new business opportunities because they have the latest technology and/or additional capability.
Weigh the costs and benefits of any potential expansion. Some businesses need more fixed assets (buildings, equipment, etc.), while others need working capital. Also evaluate your business model. The best margins come from companies that have a specific niche in the market—whether talent, equipment or products. Identify what you do better than anyone else and pursue a specific growth strategy aligned with that in mind.
Once you’ve determined that expansion is in order, you’ll need some financial backing, and having adequate credit is essential. When meeting with a banker, come armed with all your company financials and balance sheets, other financial information and even information about your personal assets. It is also beneficial to be able to provide projections of what you’ll be able to do with more capital to show the potential return on investment. Demonstrate how you’ll be able to gain new business or fulfill existing orders once you have the additional capacity. If this information is in your head, but you are struggling with getting it into a pretty format, reach out to your banker, who likely has a template for the information they like to see.
Your banker can also help you determine which type of loan is best for your specific situation. This could be conventional financing, a short-term line of credit or a small business administration loan (SBA). SBA financing (a government guaranty of a portion of the loan) may make sense if you need to stretch out your payments over a longer period to keep a steady cash flow, especially if your growth strategy doesn’t come to fruition as quickly as expected.
Some business owners get in a rut with their banker and have as many as half a dozen or more notes outstanding that they’ve accumulated over the years. At Investors Community Bank, we like to approach a client’s debt structure as a “clean sheet of paper,” meaning we help determine the best way to finance debt and get some cash flow relief for our clients. This way, owners can have immediate access to capital to continue to fund their growth.
At some point, it may make sense to allocate more debt on real estate and less on equipment, so you have the cash flow ability to add new equipment without being crushed by a new loan payment. By starting with a fresh perspective and re-allocating your overall debt structure, you can be poised for growth — and you’ll have a clear picture of how much additional debt you actually need and can handle.
Establish a Relationship
Whatever growth phase your business is in, it’s important to have a relationship with a banker you trust and can call when needs or questions arise. Look for a partner who will go beyond typical “banking” and use his or her network to connect you with others who can help you do business—executives, salespeople, advisors, consultants, board members, etc. Bankers are often in-the-know about opportunities well before they’re made public.
Reaching out to your banker when experiencing or anticipating an expansion can help you create a well-structured financial plan. Schedule a meeting to discuss your objectives and current state of the business’ finances. They’ll help you understand what your overall financial picture looks like in the bank’s eyes. Then, together, you can map out a strategy to accomplish your business goals.
Seize the Opportunity
After you have gone through the above process, it is time to seize the opportunity. At this point you should be well prepared to execute the plan you have put in place and have confidence you have developed the right plan to move your company forward. You should have built in some buffer for when things don’t go according to plan. This is where you put your plan into action, see the benefits of your planning and get some return on the investment you made into your business. Continue to periodically meet with your banker as the plan unfolds so they are in the loop and can proactively advise and have in place what you need.