Business financing can be used in multiple ways to expand your business; such as launching new products, locations, improving operations and maximizing profit margins, or through external growth opportunities like acquiring new businesses. In a nutshell, Business expansion financing is used to facilitate long-term growth, revenue, and profit for the business. Different businesses, interpret “expansion” in different ways. For a restaurant, perhaps it is adding a patio for the hot summer season or opening a new location. For an auto shop, it could be adding additional brands or inventory that fits with the customer base and will generate significant incremental revenue.
How to Use Business Financing to Expand Your Business
For any small business, keeping a close eye on their finances and financial health is key when figuring out the strategy for expansion. It’s important to do thorough research and understand what the investment will deliver in terms of financial rewards, how long it will take, and how the loan will be paid back while reaping the benefits of the investment to the fullest.
Don’t fall into the trap, or at the very least be very cautious before seeking out a business loan because your business is struggling to stay afloat or if you are intending on using the funds to pay off outstanding bills or salaries. A business loan is best used to propel your business forward rather than keep it from drowning. Because there are costs associated with borrowing, if you take out a loan for the wrong purpose, it is likely to result in short-term relief, but even greater long-term pain.
Some useful ways in which businesses can use financed capital include:
1. Increasing/Expanding Operating Facilities
As businesses grow their operations, they start running short of space to accommodate their growing staff or manage their higher inventory levels. In such circumstances, businesses tend to enhance their operations by gaining access to additional working space or improving the efficiency of their existing facilities. For example, improve the facility layout to allow for extra space for staff, or introducing new technology to increase output volume. For many small businesses, as they become more stable, location and physical expansion become important considerations. A successful restaurant, a new location can be a huge boost to revenue but requires an initial investment. A well calculated and executed business financing plan can help propel a savvy small business owner to the next level but can also hurt someone who doesn’t put enough thought into the details and hard numbers.
2. Equipment Upgrades
Businesses need to make sure they have the latest equipment to facilitate the growing customer base and maintain their service levels during the growth period. Utilizing a business loan for equipment upgrades is an effective way to expand your business so there is no compromise on your product or service quality. In addition, new equipment can actually allow you to expand your product selection or improve efficiency. For example, a restaurant may want to introduce an ice cream machine and add it to the menu. A spa or beauty salon can invest in a new tanning bed that will increase the revenue by 15% by having extra capacity for clients.
3. Purchasing New Inventory
As your business grows into new markets, you will have only one chance to make the right impression on your first-time customers. If you run out of inventory for high demand products, customers may choose your competitor. Utilizing your business expansion loan for filling up your stock to appropriate levels will play an important role in your business expansion process. However, it is very important to plan strategically when taking out financing for inventory purposes. Remember that the loan must be paid back, so make sure you have calculated the time it will take you to sell the newly acquired inventory, the revenue you will generate, and how this will translate into bottom line profits after you’ve paid back your loan. If you purchase inventory that is not selling over the next 6 months, your loan payments will start eating away at your margins.
4. Increasing Manpower
You will need efficient and productive staff to operate and manage the growing operations of your company. Adding quality staff to your team will ensure a smooth running of operations as you grow your business. But again, take into account the extra expense on staff in relation to the incremental revenue they will bring into your business. Then factor in your financing costs to make sure you have a winning long-term formula for your investment.
If you are contemplating using a loan to expand and grow your business, please give us a call here at OnDeck. We’ve helped thousands of businesses, just like yours, with efficient business financing across Canada and would be happy to walk you through your options.