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How to Finance a Business Expansion

There are a number of benefits associated with expanding your business; including welcoming new employees, raising salaries and becoming a more recognised brand. Large amounts of business finance are often required to support and maintain this growth though, so read on for inspiration on where to find the funds to fuel an expansion.
How to Finance a Business Expansion

Updated on 29/09/2020

Expansion can be exciting. It’s all about seizing new opportunities and growing your business, and it may position you better to reward your staff for their hard work. If you’re wanting to find out the ways to finance your business’ expansion - perhaps a growth opportunity has come your way or you’ve spotted a way to capture more market share - then you’ve come to the right place.

In the following article, we’ll outline the key things to be aware of when looking to expand your operations, before giving an overview of some of the key sources of finance that could be particularly useful to businesses that are looking to expand.

What do I need to know before choosing a financing method?

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There are a number of ways you can fund a business expansion. Before you start looking into the exact tactics and financing methods to use, though, it’s important to build a clear understanding of:

Your reason for expansion

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If you’re simply looking to expand your product range, you may want to explore short-to-medium ranged financing options in case you decide to revert back to your original product set if the venture doesn’t prove too profitable.

If you’re looking to open a new premises, though, you may want to look at a longer-term financial agreement. So, the purpose behind your expansion can have a huge impact on the type of financing options you consider.

It’s definitely worth documenting and talking about your specific reason for expansion before you start looking for business finance so that you firstly have a clear strategy for what you will be doing with the finance but also because most lenders will ask you what you plan to use the funds for if your application is successful, as some may have restrictions on what they are happy to lend for. In this case, it’s always worth checking a lender’s criteria before you apply to ensure your application has more of a chance of being successful.

Your cash flow

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Do you have a full understanding of your weekly and monthly cash flow? Have you prepared a cash flow forecast to enable thorough planning for the future? If not, diving deeper into your current finances could be a vital step to take before exploring your financing options for an expansion.

Why is this? Well, this background information will help you set reasonable expectations for how your cash flow could look when you start adding new layers of finance to counter expansion costs.

For example, you may discover that your current cash flow positions you well to use internal financing to fund the installation costs associated with a new piece of machinery you’re hoping to acquire.

A timeline for your expansion plan

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One key factor that could help you differentiate between financing methods is the when you’re likely to need cash injections. A timeline could show:

  • When you expect to have to pay bills.
  • What costs you’re likely to run into and how much money you’ll need to meet them.
  • When you want to make investments.

Developing this timeline is a fairly quick action you could take now which may make your life easier in the long run.

If the opportunity you’re capitalising upon is sparked by a short-term increase in purchases for your industry, you may want a short-term financing method to help you buy enough stock to quickly meet rising demands.

However, if you anticipate a longer-term opportunity for your business and are planning to dive into a period of sustained growth, then a longer-term source of business finance with smaller repayment periods may be needed to protect your cash flow in the short-term.

Financing options for business expansions

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Having established exactly what finances you’ll need and where they’re likely to be allocated, you should be ready to start comparing and exploring financing options to find the right fit for your business. Here are our picks for some of the ways businesses can source finance in today’s world.

1. Business loan

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Once of the ways in which businesses can fund an expansion is through a business loan. This route is often chosen by businesses because it can offer flexibility, a variety of loan amounts, flexible repayment periods and speed (in terms of how quickly the money can reach your account after signing a loan agreement).

Banks and business loan providers can offer both small and large amounts of money, so business loans can match a range of business owners’ financial requirements. Lenders in these categories can offer competitive interest rates so its worth doing your research to find the best rate in the market to suit your needs.

One of the first considerations of a business loan, however, is their eligibility. Lenders set their criterias to ensure that borrowers are able to repay their loans, and they may also want to build a good picture of a borrower before making an agreement to align with their own risk appetite. They build this picture through processes such as credit checks, background checks, and asking for your business’ financial records.

2. Internal business finance

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When you’re looking to finance an expansion, the first place you may look for finance is within your own business. Reinvesting profit into your business can be a great way to improve your general business offering without needing to take on the added risk associated with paying money back to an external lender.

That being said, careful management of your business’ finances is an essential part of a business expansion plan as you need to ensure that you aren’t likely to put your business in a position where it lacks access to sufficient working capital. For example, if you’re looking to buy a new range of products that must be bought in bulk, you may need to weigh up whether the stock or cash is more beneficial to your business at that time. Naturally, this financing method often requires longer-term planning.

3. Business grants

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If your business falls into a particular sector or region, you may be entitled to a business grant. A business grant means you get the finances to invest in your business without actually having to pay any of it back which is obviously a huge benefit for small businesses in particular.

Grants could be a great option for many businesses, but applying for one can become a lengthy process that involves a lot of paperwork, and you may not be eligible. If you want to apply for a grant, it’s a good idea to apply well in advance of your expansion activities to get the ball rolling before crucial cash injections are needed.

Each grant has its own criteria and application process so it’s important that you do your research beforehand. You can find the full list of grant providers, based on your business’ location, size and sector on the government website.

There are many other viable sources of finance for business expansions, including crowdfunding and even selling shares of your business to potential investors. You can learn more about the various other sources of business finance and types of business loans available by heading over to our blog.

How could Esme help?

These are difficult times for many businesses, so it’s important now more than ever to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our FAQs page for information about how we may be able to support you.