Many businesses don’t think about expansion financing until their backs are against the wall, but we think it should be on your radar before things get to that point.
Starting a business takes a lot of skill, dedication, and capital. But more often than not, maintaining a successful business can be even trickier. According to the Small Business Administration, nearly half of small businesses fail after five years.
The remaining 50 percent succeed for various reasons. Smart budgeting, market demands, and customer satisfaction are a few. But one of the greatest markers of success is a willingness to grow. For a brick-and-mortar store, that could mean opening a new location. For a software-as-a-service company, it could translate to hiring additional staff. For a healthcare company, it might be a matter of acquiring new equipment to manufacture medical tools.
Growth is not just important in the business world; it’s vital. If your company is not expanding its capabilities, workforce, or customer base, it’s likely losing profits because the cost of labor, material, and property continues to rise regardless. Studies suggest growth also influences employee morale and customer loyalty. Staying still can mean stagnation, or worse.
Of course, expanding requires financing. While traditional lenders like banks have been hesitant to lend to small-to-medium sized enterprises (SMEs) since the 2008 financial crisis, alternative lenders are far more apt to be financing expansion.
These lenders, including business development companies (BDC) like Saratoga Investment Corp., offer flexibility, easy applications, quick turnaround, and a high likelihood of approval.
What Is Expansion Financing?
In simple terms, expansion financing is capital used to enlarge a company’s assets by internal or external means. Expansion can mean adding new products or securing a larger customer base. It can also mean big moves like mergers and acquisitions.
There are several ways to finance expansion, including government grants, crowdfunding websites, and small business loans. Two of the most common methods are debt financing and equity financing.
Debt financing: A loan offered on the promise it will be paid back in the future, with interest. The business owner does not have to cede any control of his or her operation.
Equity financing: This method requires a company to issue shares of stock to receive money in return. Selling shares can mean splitting some control over a company, but it means the business owner is under no obligation to repay a debt.
Before taking the plunge, there are a few questions every business owner should ask themselves:
- Will an expansion be profitable?
- How much will it cost?
- Is my business on solid grounds?
- What financing option fits my business best?
Adding a second location or implementing cutting-edge technology may seem tantalizing, but instituting a cost/benefit analysis is a crucial step to take before seeking an expansion loan. The same goes for reviewing your current business model: if a bad credit score or overwhelmed workforce is hampering existing operations, an expansion may need to wait.
Benefits of Expansion Financing
There is much to look forward to once you make the decision to expand. An influx of capital allows a business to explore new fields, reach more customers, and reimagine its output.
Recently, a comic book company specializing in non-superhero stories used expansion financing to merge with a TV/film company, paving the way for future adaptations of its most popular comics. In similar news, a long-lasting tool company achieved new physical growth by building a larger corporate space with the help of an expansion loan.
As mentioned earlier, growth can translate to greater employee and customer loyalty. Thriving businesses inspire and motivate, giving workers the best tools to meet their goals and demonstrating consistent care for longtime customers.
What to Look For in a Lender
When choosing a financial lender, qualities like honesty and supportiveness are good indicators that you’re looking in the right places. Take time researching prospective lenders to make sure they also have a history of success, client satisfaction, and consistent approval practices.
Overall, the best alternative lenders offer:
- Transparency: No hidden fees, no sudden repayment changes. An alternative lender should be clear from the start about rates, repayment schedules, and deadlines.
- Trustworthiness: No automated emails or waiting on hold for hours. A good lender is highly communicative and personable.
- Flexibility: A lender should be willing to work with businesses to find a repayment schedule that fits their specific needs and abilities.
- Speed: When an opportunity to grow comes, speed is paramount. The best lenders offer a simple approval process and quick disbursement of funds.
Getting Started
Financing expansion — whether that means buying better equipment, renting a larger office space, or creating a new product — can be a daunting undertaking. These days, finding the right lender can mean sorting through innumerable choices. Alternative lenders, including BDCs like Saratoga Investment Corp., are often the best and least-complicated option for small businesses looking to expand.
Saratoga’s senior investment professionals have decades of experience helping small-to-medium enterprises achieve their financial goals in the middle market. Our experts typically assist those with revenues between $8 million and $250 million and EBITDAs of at least $2 million. Saratoga has always believed in a “partnership approach”: providing patient capital and guidance to a wide-range of growing businesses.
If you’re exploring financial options for expansion, it’s important to seek flexibility and transparency. Consider reviewing Saratoga’s investment profile to determine if our expertise suits your company’s needs.