I WANT TO GROW MY SMALL BUSINESS
Once you’ve given serious consideration to the pros and cons of expanding your small business and feel comfortable that the answer is a definite yes then there are several actions required. The first one is to produce a detailed Business Plan (we’ll come back to this) before you decide which source of growth finance is right for you and your business. Let’s look at the various types of growth finance and the major considerations associated with each.
RETAINED PROFITS – this relates to the ‘free’ cash the business has generated as profit over the previous years of trading. The upside is that this carries no cost in terms of interest payments or giving away of ownership of the business. However, it is likely that a small business will only have relatively little retained profit and this will mean your growth trajectory will be very slow. It also provides no room for unseen issues during the growth process.
FAMILY AND FRIENDS – if you have wealthy parents or generous friends then this is an option. However, growing a small business is very stressfull and there are good times and bad times. Can the relationship you have with this group of financers survive the bad times? What will life be like if you ultimately fail to return their investment?
BANK OVERDRAFT – if you have a good track record with your Bank then your relationship manager may be prepared to extend a short term overdraft facility to help with expansion. However, it won’t be a large sum of money, have a short timescale for repayment and will attract a high rate of interest. Also be wary of the dreaded Directors Guarantee that many Banks will demand from you – this will put your personal assets, including your home, at risk.
BANK LOAN – similar to an overdraft but with a longer term for repayment and legally binding controls over your personal assets if you fail to repay the loan. Banks nowadays are very cautious about lending to small businesses following the problems caused during the financial crash eight years ago. They will expect to see at least 3 years of consistent profits and solid cash flow.
CROWD FUNDING AND PEER TO PEER – this relatively new form of growth finance has been facilitated by recent developments in technology. They allow potential investors to invest small amounts of money across many small businesses. This type of investment either attracts a rate of interest (similar to a Bank loan) or the giving up of some of your shares in the businesses. The downsides include the need for several years of unblemished trading, the possibility that you will have many minor shareholders in the business and once again the Directors Guarantee.
ANGEL INVESTMENT – this option involves an individual or small group of people in a syndicate investing in your small business in return for a number of your shares. This may bring with it help from the investor in terms of coaching and or mentoring as well as hands on business advice. The downside is a reduced ownership of your business and potentially less control. However, if the investment valuation is performed correctly and the terms of the agreement negotiated with the assistance of legal advice, then this is an ideal way to fund the growth of your small business.
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