How to finance business expansion

Looking to take your SME to the next level? Great! Though chances are it could take some extra cash to get your growth plans off the ground, so here’s everything you need to know about funding business expansion.

Planning is key when it comes to business expansion, as it will not only make the process far more streamlined, but lenders are unlikely to view you favourably if you haven’t meticulously planned what you’ll be doing with the funds – and crucially, how they’ll get their money back.

This means that, much like you’ll need a business plan to show lenders when seeking funds to start a business, you’ll need a new one – or at least, an updated one – when you’re looking to expand as well. This will need to include your growth strategy, your funding requirements and your expansion method, as well as highlighting a clear repayment vehicle so the lender is confident they’ll be repaid.

Make sure to be realistic as well. Any form of business expansion can lead to teething difficulties and potential cashflow issues, and it’s important to understand both your SME’s capacity to take on more debt and its ability to repay it. You should ideally have a sufficient level of capital to keep you afloat during any period of adjustment, and it’s always wise to seek expert financial advice as well.

Once you’ve suitably planned for expansion, the next step is sourcing the right funding method to fuel that growth.  Here are a few of the most common options available.

Small business loans will likely be your first port of call, with this method offering a simple lump sum that you’ll repay at an agreed interest rate. The rate can be variable or fixed and will be decided based on your business plan, credit risk and whether any collateral is put up against the loan, with everything being determined on a case-by-case basis. The term can be flexible too.

If your growth plans incorporate new property, commercial mortgages will be your best bet. These come in different forms depending on whether you’ll be using the property as trading premises or an investment, for example if you’ll be renting an office building out to a third party. Either way, you’ll normally need to offer a deposit of at least 25%, unless you’re using another property as collateral (in which case you’ll need to hold substantial equity in it).

Rates can be variable or fixed and terms can be just as flexible, and the loan-to-value (LTV) can similarly vary depending on the type of SME you own. This is a complex area of business funding and it’s worth speaking to a commercial finance specialist to discuss your options.

Bridging loans are ideal for short-term funding requirements, often used as the first step in a property purchase when speed is paramount. They can complete in a matter of weeks and often max out at terms of 18 months (12 months will be more common), though typically come with higher interest rates than other forms of business finance.

They can be used to buy new premises, to develop or renovate property or even in situations when you need a short-term cash injection – provided you’ve already got suitable security for it – and rely on you having a cast-iron method of repayment. This may be the sale of the property (perhaps after you’ve renovated it) or refinancing to a longer-term form of borrowing, such as a commercial mortgage.

Invoice finance can be particularly suitable for SMEs looking to expand, as businesses will only be eligible for this kind of funding if they already have a turnover of at least £50,000. It can be useful if you need a smaller cash injection and comes in two forms, invoice factoring and invoice discounting, both of which allow you to secure a loan against the value of your outstanding invoices.

If you’re looking to purchase new equipment to grow your business, or perhaps already have expensive machinery that you want to use as collateral for new funding, asset finance could be an option. There are various forms available depending on your business needs, so make sure to speak to an expert asset finance broker to discuss the option that could be best for you.

Expansion or venture capital is specifically designed to help fuel business growth. Essentially, it’s a form of external investment from a specialist growth capital firm: they’ll invest money into your SME for a pre-agreed period of time in return for an equity stake in your business. The benefit of this method is that you’ll have the advice of the investor on-hand as well, and because they’ll be looking to boost their own returns, there’s the potential for rapidly accelerated growth.

You’ll notice that the majority of the above funding methods involve taking on debt – your business borrows money that it has to repay after a set period of time, plus any interest accrued. This is different to equity, which is where you sell an interest (or stake) in the company in order to raise money. The external investor still expects to be repaid, but their returns will be based on the growth of your company, rather than a pre-agreed interest rate.

Setting your sights more globally can have a huge payoff – you’re entering entirely new markets and are reaching new audiences, which could propel your growth ambitions to new levels. Yet it can also be a lot more complex. You’ll need to do far more than seek new funding methods; you’ll need to research market entry strategies and brand positioning methods, and finance options could be very different if you’re heading into overseas territories. This will require a huge amount of planning and will rely heavily on expert advice, so make sure to speak to advisers familiar with international expansion.