Handling Your Debts: How to Expand Without Putting Your Budget at Risk

Debts

Business expansion can be challenging because of the huge upfront capital it requires. Business owners are often hesitant to take this step to avoid any financial crisis.

However, there are ways to expand without threatening the financial viability of your business. This article will discuss the ways you can cost-effectively navigate business expansion.

Expanding Your Business Within Your Budget

The decision to expand is often ascribed to several factors. Your industry might be growing, or customers might be demanding more service offerings. Whatever your reasons are, there are two major cost-effective pathways to expanding your business. They are: leveraging your customers and leveraging external sources.

Leveraging Your Customers for Expansion

Many times customer strength is often overlooked as an expansion route. However, increasing your customer base is a viable option depending on the size of expansion you intend to undertake. You can significantly grow your revenue and profit margins with a solid customer base. These outcomes will boost your business’s ability to fund an expansion. The primary benefit of this option is that it attracts little to no costs.

To grow your customer base, you can create referral programs, adopt personalization technology to boost sales leads, and leverage social media to intensify advertising. You can also provide new service offerings. This strategy mainly applies if your business operates in a highly innovative sector like technology. New service offerings would help maintain your existing customer base and introduce new customers.

External Sources for Expanding Your Business

As your business grows, revenue from increased sales might not be enough to fund the extent of expansion you need. In such situations, external funding sources will come in handy. These sources manifest through different channels.

1. Credit from Friends and Close Relatives: Many times, business owners seeking to expand their business operations turn to close relatives to obtain credit. While this option is more suited for smaller companies, it has several benefits. One of them is that you are more likely to get credit at a favorable interest rate when you leverage your connections. This way, you will access funds at the lowest possible cost. However, like the sales strategy, the funds you can access through this strategy are limited. While it might provide considerably higher funds than the sales strategy (depending on your connections), you might not be able to undertake significant expansions with it.

2. Leveraging Investors: Many companies and individuals seek to give out credit in exchange for investment returns and equity. It’s a viable option if you are willing to share ownership of your business while getting the funds needed to drive expansion. Depending on your business’s current stage, you can decide to go with angel investors, venture capital firms, or private equity firms. One significant advantage of this option is that your business will often get to leverage the management expertise and business connection of your investor(s) to spur your business growth. It’s also a way to access expansion funds without compromising your business’ liquidity. However, the decision to utilize investors can limit your control over the company. Equity financing can be highly demanding and time-consuming. Also, your business might be unable to keep up with the investment returns demanded by investors.

3. Commercial Loans: It’s the most common option for businesses seeking to fund their expansion without eroding their budget. Commercial banks are well-positioned to pull funding weight for significant expansions. So while this option is also suitable for small to mid-range companies, commercial loans are well-suited for large companies. However, the financial position of your business would often determine the risk attached to the loan. Commercial banks take creditworthiness seriously, so your interest rates can significantly increase if the loan is perceived as high risk.

Nevertheless, if you are convinced that your business can obtain commercial loans at a favorable rate, this option is your best bet. However, the major con of commercial loans is that banks do not lend to companies with low creditworthiness. While they might decide to simply classify the loan as high risk and increase the interest rate accordingly, commercial banks will not provide loans if they perceive your business’ financial position as too risky.

4. Personal Line of Credit and Credit Cards: If you intend to access credit for your business expansion, revolving credit accounts might be your best bet. These are flexible accounts that provide borrowers with constant credit availability. For revolving credit, you can either opt for a personal line of credit or credit cards.

Personal credit lines are accounts with a fixed amount that borrowers can access for a set period. These credit lines often span an average of two years. On the other hand, credit cards offer a more flexible credit availability by allowing borrowers to access credit and repay with a fixed amount. However, each option has its pros and cons. Thus, it would be helpful to read about a personal line of credit vs credit card to get a better understanding of the topic.

Ultimately, while expansion is essential for your business, choosing an expansion channel that does not compromise your business or financial viability is crucial. It’s advisable to choose a cost-effective expansion option that suits your business’s current position and size.