Is expanding businesses with loans a good approach?

Let me start with a very simple small business tip for growth. Write down the top five things that you do well that differentiate you from your competition. Now, how much of your time and money is spent investing in those five areas? Move your time and money away from the things that aren’t on the list and pour it into the things that are on your list. Your business will improve, things will get simpler, and you’ll conserve a lot of time and money that you’re wasting on stuff that isn’t working.

Now let’s get down to business….. Capital is so important to growing a business! If you don’t have what you need for your business’s development, all you’re doing is paying your bills and just getting by. Having enough working capital to pay those bills on time every month is important, but to take your business further, it’s growth capital you should be paying close attention to. To do that, you have to understand how growth capital works, what it does, and how it helps your company develop from a small business to something much larger and stronger.

There are three primary sources of growth capital for a small business:

1. Equity capital from the founder(s) and/or outside investor(s).
2. A combination of operating cash flow and profits left in the business, aka, retained earnings.
3. Borrowed funds, typically from a lender or bank.

What options do you have for funding when a bank denies your business loan?

It can take time to see a business develop, but with the right amount of growth capital, that development is certainly possible. Too many business owners fail to understand the difference between working capital and growth capital, which can mean that they don’t spend enough time developing their growth capital the way they should. When it comes time to expand the business, there isn’t any money available for that expansion, so the business can’t develop the way it needs to in order to keep up with the competition. That can have devastating effects on a company that would otherwise be very successful, and it’s something any company needs to avoid.

What Is Growth Capital?

Unlike working capital, which is used for bills and basic, cyclical expenses, growth capital isn’t tied to any particular business cycle. Instead, growth capital is designed to provide long-term health for the business. It builds up over time, and can ensure the business’s well-being. Once a business decides that it is going to make a major change, like an expansion, adding another location, or a merger with another company, growth capital will come into play and be used. These kinds of changes are very expensive, but they are not recurring expenses that are going to be seen every month. Since they aren’t recurring, they don’t come out of working capital.

Without a growth capital fund to pull from, however, a business can’t really accomplish anything beyond its day to day operations. There will not be any expansion when there isn’t any growth capital to use, this generally comes about from poor financial planning and can be profoundly damaging to a small business.

What sources are available to finance working capital needs of small businesses?

Probably the single most common method for funding business growth is by obtaining a small business loan. However, there are a number of different options that come with small business loans, and in order to choose the right one, you need to understand which loans work best with what type of enterprise. You should take into consideration the type of operation, size of the business in terms of staff and assets, and overall monthly or yearly return. Exploring options for loans can even clue you in to loans that are specifically designed for your type of enterprise. Loans can be either long-term or short-term, and each have their particular uses. Small business loans are usually very reliable, making them a great option for business financing available to small business owners. You can put a small business loan “to work” immediately for your business, whether it means meeting payroll for a few months, negotiating a great deal on inventory for paying in cash or hiring and training those new employees you need.

Many small businesses owners are hesitant to issue equity or take out loans to fuel business growth. However, businesses may find that operations stagnate without an extra capital injection. When your competitors continue to expand and develop and your business can’t do the same, you can quickly end up without enough customers to keep your doors open. A lack of growth capital can translate into a lack of working capital, because the business is not able to keep up with the kinds of things it should be doing in order to compete in its market.

As a company continues to gain a higher level of working capital, it should take that money and invest it back into the company. This is done on a long-term basis, so the investment becomes growth capital and is stored (earning interest) until the company decides that the capital needs to be used for a specific thing. If there isn’t enough money available, the company can wait until it has more, but sound investment strategies shorten that wait considerably. Remodeling the company’s building, adding new equipment, and other large expenses are a big part of a business’s development, and growth capital is the heart of that development. Keeping it separate from working capital is also important, to ensure that it isn’t used for business cycle expenses that could deplete its reserves.

How Does Growth Capital Help Your Business?

When people begin to operate a business, they may not be clear on the major differences between working capital and growth capital. If they don’t begin planning for both types of capital right from the beginning, they may not get what they really need from their business. They also have to be careful that they don’t try to expand too fast, because that can deplete all of their growth capital at once. If it is used up and then more is needed, it can leave a company in a precarious position and stop them from continuing their expansion. If that happens in the middle of growth, it can be highly detrimental and could even spell the end of the business.

In some cases, access to capital is a great way to take advantage of new opportunities. In others, however, it can be a good way to pull a struggling company out of a pit of poor circumstances. Despite the potential for risk, capital can be the saving grace when trouble comes to call, providing the means to bridge the gap between failure and success. A few extra dollars today may mean an empire tomorrow, and can be the necessary protection against closing up for good.

A business loan or any of the funding options mentioned above, whether for a few thousand dollars or a few million, can make previously unavailable opportunities obtainable, providing a customized solution in a time of need and keeping the lights on even when the going gets rough. With ready access to business capital, the possibilities are literally limitless, offering the assets you need to promote a positive trajectory and inspire healthy growth.