Too often, entrepreneurs--especially inexperienced ones--take the "luxury" approach to funding, incorporating every bell and whistle into their expansion plan by trying to accomplish all goals at one time. That's nice, but it's usually not reality and often forces businesses to be cash strapped because of high debt repayments.
That's why I suggest entrepreneurs take a three-pronged approach to their expansion planning. This exercise helps business people ruthlessly prioritize their needs and determine what is a must and what is frivolous.
A, and then B, and then C
Let's say an entrepreneur believes he or she needs $1 million to make their expansion plans a reality.
Now, write up a plan for that amount. What are you going to do with that million? What are the specific investments you will make? What will your cash flow look like afterward? What does your business, in general, look like?
Now do the same exercise with $500,000. Ask yourself the same questions, as well as anything else that's pertinent. Can you primarily accomplish the same goals with half the cash?
Finally, do the exercise one more time, this time with a loan of only $250,000. What are the answers to the questions now? Might it be possible to do what you want to do with only a quarter of the original loan?
And the answer is ...
No set answer will be correct.
Perhaps your initial inclination that you need $1 million was correct. And there's a good chance that $250,000 simply won't get the job done.
But there is a decent probability that the middle option might be feasible, especially if it makes you realize that some of the more frivolous "wish list" things you'd like to do are best set aside for now. Remember, you don't have to accomplish everything at once, and a scaled-down plan might allow you to better focus on more important things, preventing you from overextending yourself.
Of course, don't get too stuck on exact numbers. Maybe this exercise will have you realize your plan can go ahead effectively for $790,000. Or $615,000. Or $485,000. Or any other number.
The purpose is to gain some clarity and sharpen your focus--not to mention to allow you to decide what makes you most comfortable and enables you to sleep at night. Don't underestimate the value of that.
Also, keep in mind the time factor. The larger the loan you seek, the longer it likely will take to receive approval from a lender. The saying "time is money" always rings true, especially in this scenario. You might miss opportunities waiting for lender approval.
Remember, business tends to be more of a marathon than a sprint. You need to pace yourself in all aspects, including financing, to better your odds of finishing the race. Hopefully, this exercise helps you accomplish that.