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:
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.