As small businesses become successful and profitable, the natural inclination is to expand. Expansion can allow you to meet the demands of a larger customer base, therefore increasing profits and providing a greater return to you, the entrepreneur. For many, however, financing a business expansion is a daunting task. Most entrepreneurs ask the wrong questions when considering business expansion; as a result, navigating the tricky waters of lenders and banks becomes considerably more difficult. This section is designed to teach you what you need to consider before applying for expansion loans, the questions you should be asking, the different types of expansion capital available, and how TVC might be able to help you get the expansion loan you need!

Things to consider before asking for money

For many small business owners, obtaining expansion loans is a difficult and frustrating experience. The truth is that if your business is growing and profitable, acquiring money for business expansion should be easier than obtaining start-up funding. With a track record of profits and growth, a steady credit history, cash flow charts and financial statements, and a positive business reputation, you should have the tools necessary to successfully apply for another loan. So where do most entrepreneurs go wrong?

The majority of entrepreneurs ask two questions when seeking funding for business expansion. They ask, where can I get funding, and how much should I ask for? The questions you should be asking are, why do I need funding, and what am I going to do with it? Before approaching lenders for a loan, you must know exactly what it is you need funding for. By doing your homework ahead of time, you will not only know how much you need, but you will be able to determine the best source for your funding.

The first question you need to ask yourself is what type of expansion you are seeking. Think about your current office or store front. Can you renovate the current space to enlarge it so that it might better accommodate your increased activities? Do you need to move to a larger space somewhere else nearby? Or are you planning on maintaining your current space and acquiring a second location? Once you know what type of expansion you are seeking, you will have a better idea of the costs involved. Research your expansion beforehand. For example, if you are moving to a new space, will you be buying or leasing, and how much will it cost? Even if you do not know exactly where you will be moving, you should have an idea of the general area and the cost range you are considering.

You must also consider the other cost requirements of such an expansion. Are there new staffing requirements? Will you need to hire additional managers for a second location, or will you be bringing on additional associates to run operations at a larger office? What other costs will be increasing with this expansion? As your production capacity increases, what are the costs associated with larger supply production? Never underestimate the amount you will need for expansion or ask for less than you need because you think you have a better chance of receiving a smaller loan. Trying to expand with less money than is required could be extremely detrimental to your business.

Revising your business plan

Once you have laid out your action plan for expansion, you should have a good idea of the exact costs associated with your growth. The next step is to revise your business plan and prepare it for lenders, who will want to see many things that may not have been included in your original plan. Click here to review how to write a business plan. If your plan has been updated regularly, you will have little work to do; if, on the other hand, you have not revised your business plan since starting up your business, there are several things you will need to update and add.

Just as when you wrote the original business plan, your executive summary should be revised last because it should encompass your entire plan. Look at each section and how it has changed since you last wrote. When you originally created your business plan, it was based on speculations, market research, and sales projections. Now you have actual progress and demonstrated earnings, and those elements must be reflected in your business plan. The section for Business Opportunity should be revised to include your business history, the process that has been made, and the results and growth benchmarks that have proven the viability of your business idea. Your Marketing & Sales Plan should include evidence that your market analysis was correct and should demonstrate your ability to reach your target audience. As you prepare to expand your business, this section should be revised to include your plans to reach a larger market, and ramp up your sales based on the increased supply you will be able to produce. Your Management Team & Personnel section should be updated with all of the new resumes and staff descriptions of managers and other hires that have taken place along the course of your business. Additional staffing requirements you will incur as a result of your business expansion should be included with a timeline for hiring. Your Operating Plan must include not only a description of your current operating facilities and equipment, but also your plans for expansion, including your new space, new production facilities, new information technology infrastructure, and any other plans you have for operational growth.

Your financial section should be much longer now that your business has a financial track record. In this section, you should include: your company’s financial statements for the past three years, including the current financial period; your personal financial statements along with those of any other partners or principals (to demonstrate net worth outside of business); comprehensive statements of debts and accounts receivable; and income tax returns for the past three years. Other financial materials you will need will include the amount of loan requested and the exact details for its use, a statement of collateral to be used against the loan, and an updated earnings projection.

Where to go for expansion financing

Now that you have determined how much funding you will need for your expansion, and you have done the work necessary to meet with a lender, it is time to determine the most appropriate source of your funding. There are several different options when looking for business expansion capital. Each funding source brings with it a series of pros and cons that should be weighed before approaching any of them. Remember that every lender has its own requirements. Just because you get turned down for a loan from one does not mean you should give up. By researching the different types of lenders thoroughly, you should find a lender to meet your expansion needs.

Banks: Banks are usually the first place people look when they want to borrow money. Banks offer a variety of loans and can often advise you as to which type of loan would be best for your needs. Some loans, for example, require you to make set payments of both the principal and interest, whereas others require you to pay back only the interest with a lump payment of the entire principal at the end. The obvious advantage to approaching banks is that they are designed as lenders, but if you have a bad credit history or have accumulated debt, it can be difficult to get approval for a loan at most banks. The best way to determine whether bank loans are appropriate for your needs is to do your research: locate the banks in your region, find out what types of loans they offer, and learn what requirements they have for approving loans. Click here to locate banks in your area through TVC’s Veteran Virtual Business Incubator.

Venture Capital Firms: Venture capital is for high-growth firms that are looking to expand into multi-million dollar firms within a period of five years or less. Venture capital firms generally have up to $1 billion to invest in emerging companies, but that investment comes with a price. Venture capital firms will typically invest between $500,000 and $10 million in a single company, but they demand significant equity in return. The earlier the stage of investment, the more equity they require. Obtaining venture capital funds is not easy either, as each firm has lengthy (and varying) requirements for investment. If you run a high-growth company, and you are looking for serious funding to rapidly expand your business, venture capital might be for you. Click here to locate venture capital firms in your area through TVC’s Veteran Virtual Business Incubator.

Angel Investors: Angel investors are individuals who invest their own money in entrepreneurial ventures in return for equity. Angel investors can be persons you know or persons you don’t know, and an also work as an individual or be part of an angel group. Angel investors generally invest smaller amounts of money in companies than do venture capitalists, making them an ideal source for funding when you have exhausted funding from your friends, family, and self, but are not yet ready to approach a venture capital firm. Many angel investors have significant entrepreneurial experience and are motivated by the desire to help young entrepreneurs succeed. They can become valuable mentors, as well as investors, so take advantage of relationships you may develop with angel investors and their networks. Click here to locate angel investors in your area through TVC’s Veteran Virtual Business Incubator.

Partners: Oftentimes, funding can be secured by current or potential partners seeking a greater share of the business. The advantage to this form of financing is that partners are already knowledgeable about the business and have confidence in its future if they are willing to make an investment. Fewer documents will be required to acquire a loan or investment from them, especially if they are already a partner in your company. The decision you as an entrepreneur must make is whether or not you are willing to give up a portion of the company in order to obtain this funding. Would you be willing to sacrifice some control of your company to gain funding, or would you rather go to banks or other lenders and maintain your control?

Friends & Family: Many people warn against the risks of borrowing money from friends and family, but there are also benefits to acquiring loans this way, and it is an extremely popular source of funding for small businesses. Friends and family already know you, your character, and your history of credit, debt, and financial management. Even friends and family considering making a loan should ask to see a business plan to make sure you are prepared to carry out your expansion, but the approval process can be infinitely easier. The terms on which you must pay back the loan will likely be more relaxed, and friends and family may not demand interest on the repayment of the loan. The obvious downside to borrowing from friends and family, of course, is the potential inability to repay the loan, damaging not only your finances but their finances and the relationships you share with those individuals.

Self-Financing: Self-financing is the most popular form of financing for small business owners, and it can serve to be extremely advantageous when you approach other lenders. By investing your own money and assets into your business, it demonstrates your faith that your business will succeed. Different forms of self-financing include borrowing against your retirement fund, taking out personal lines of credit, and utilizing a home equity loan. The obvious disadvantage to financing your business through one of these personal funding sources is that if your business flounders and you are unable to repay the money, you can lose a lot more than your business. Before putting your home on the line for your business or risking your personal credit history, carefully consider whether self-financing is the right option for you.

Access to Capital Through TVC

Whether you are looking for loans, lines of credit, or banks in your region, TVC can help you get the capital your business needs. Click here to find out what financial resources are available to you as a TVC member!

For additional help locating financial resources in your area or financing the growth of your business, check out TVC’s Veteran Virtual Business Incubator, a one-stop resource for Veteran entrepreneurs!