If you're thinking about expanding your current business--by adding a retail location, expanding your product offering, or changing the direction of your business model--that could mean your business is currently in great shape, both financially and with your customer base. Maybe you've outgrown your current physical space, or the demand for your product offering has outpaced your supply.
But not all plans for expansion are created equal, and they can sometimes backfire, sending your successful business down a path of great financial instability.
Before you cross the starting line on your plans to expand your small business, follow these four steps to determine (and follow through with) the best decisions for your company's financial future.
1. Make Sure Expansion is Your Best Bet
An objective look at your current business model will give you a new perspective on the viability of expanding your business.
Is expansion really the best financial choice? Be mindful that success at your original location does not necessarily mean your business would be equally successful at a new location. It's important to consider your target market--evaluating how individuals make buying decisions in your new location.
How does your business operate when you're not around? You can't be two places at once--so if your personal presence is an essential element of your business success, adding a location could present a problem.
Evaluate your plans for expansion objectively, and talk with a business mentor who has been through a similar decision process. The choice to expand to a new location may be great news for your business, but taking the time to objectively evaluate the pros and cons will save you from having to overcome a bad financial move later on.
This is also a great time to clean up your financial records--recent balance sheets, revenue statements, tax filings, and any other relevant data--as you'll likely need these documents for your funding application.
2. Forecast the Cost of Expansion
In order to determine how much capital you'll need to expand, you must forecast the associated costs. For a retail expansion, for example, you'll need to acquire estimates for leasing space, building out your location, hiring staff, and procuring additional inventory. Perform a break-even analysis to determine how long you'll need to support your new venture before it becomes profitable.
The good news here is, this isn't your first time around the block. Since you already have the experience of launching your first location, it will likely be much easier to forecast costs the second time around.
Use past balance sheets and revenue statements from your existing location to forecast how the first several months of operating your new location will likely play out financially, and to determine a break-even point for the expansion. But do keep in mind that expanding your business isn't always as straightforward as your existing model may be. So be sure to account for any hidden costs that could be associated with your expansion.
Once you've completed your forecast, it will be easier to determine the funding amount you'll be applying for--and you will be better prepared to demonstrate to a lender or investor how you plan to make good on their contribution.
3. Shore Up Your Business and Personal Credit
As a business owner, you should always be working to keep all of your credit ratings in top shape by consistently making payments on time, every time--both in your personal life and in your business.
Particularly if you plan to finance your expansion through a business loan, take extra precautions to ensure that your credit reports are in the best shape they can possibly be.
Pull your personal credit report from all three of the major reporting agencies--TransUnion, Experian, and Equifax--and check for any false or erroneous information. If you see an error, contact the credit bureau in writing to correct it.
You can do the same for your business credit report through Dunn & Bradstreet, the industry standard agency for the monitoring of business credit. Once you pull your report, you'll have access to the same information lenders or investors will when reviewing your business credit history.
The process of correcting errors in your credit report can be time-consuming, but it's worth it in order to prepare the best possible funding application.
4. Determine Your Best Financing Sources
Your options for financing as you expand your business are vast but will probably fall into one of three categories. Let's take a look at what each one could mean for the future of your business.
Working With Investors: Depending on the size of your business and the scope of your expansion plans, you may choose to seek out venture capital funding, or work with a private or angel investor to finance your expansion. Investors can be highly beneficial to growing small businesses, because they offer insights and experience about expanding your business that you wouldn't have on your own. However, working with an investor does mean sacrificing equity in your business, and the investor may insist on ways of doing things that don't match your plans.
Crowdfunding: If you have a loyal network of customers who are excited about your plans for expansion, consider whether crowdfunding some or all of your expansion through a platform like Kickstarter is the right move for you.
As you give loyal customers a sense of ownership in your brand, these excited micro-investors can act as brand ambassadors, helping generate buzz about your new location or expanded business model within their social networks.
Debt-Based Financing: Finally, many small business owners will choose to fund their expansion plans through a small business loan--either from a traditional bank or from an alternative lender.
Your options for debt-based expansion financing are as vast as for any other business need. If you have strong credit, you may consider a traditional term loan, or an SBA loan. If you only need a small amount (under $50,000) of financing, consider an SBA microloan.
Or, if the majority of the expenses related to your expansion will be for purchasing equipment, such as computers, manufacturing equipment, or commercial kitchen appliances--equipment financing could be a great fit for your needs.
However you decide to finance your small business, it's most important that you treat your venture objectively, remembering to treat it like a business. Do your research and make sure whatever financing plan you pursue makes the best financial sense for your company's future, and you'll be laying the framework for a successful expansion of your current business.