Financing Your Expansion
Research your options when deciding to grow your business
By Lucas Deal, Associate Editor
It takes a lot of work and careful planning to expand your business. You have to make major changes to your business plan, find a location, add staff, promote your expansion; the list goes on and on. One of the most important steps on that laundry list is securing the financing necessary to grow.
According to Greg Kenepp, chief marketing officer at The Receivables Exchange, researching your financing options is one of the first steps toward expansion.
“Given the state of the lending climate, if a business owner is looking to expand, he should consider his financing options very early on,” he says. “Unless the business already has a sizable line of credit or cash reserves, the owner is going to need some level of outside financing.”
Outside financing for expansion can be acquired from multiple locations, Kenepp says. The most common form of financing comes from bank loans, but Kenepp says the financial crisis of last decade has added another degree of difficulty to obtaining a loan.
“The economic downturn has caused most banks and financial institutions to tighten their lending standards,” he says. “For example, to satisfy bank loan requirements, a business is usually required to put up a mix of collateral, including cash and hard assets, to secure the loan, which is a tough requirement for many businesses, especially smaller businesses.”
Kenepp also says some banks have started requesting a personal guarantee from business owners when providing loans. Under this plan the dealer principal risks losing his business and personal assets if he defaults on his business loan.
That’s a terrifying proposition. But those risks don’t mean businesses can’t use conventional financing to expand.
A business that has a long working and successful relationship with a bank or financing institution will have an immediate advantage when inquiring about a loan. Because the two sides know each other, they can use their knowledge of the business and its normal loan/payment structure to create another loan viable for an expansion.
Having a strong business plan helps, too. Most of the above risks associated with financing are the result of defaulting on a loan. If your plan to expand your dealership works, then it should allow you to slowly and safely pay back your loan without financial damage.
However, if you want to expand and avoid heading to the bank, there are other options.
“With the rise in customers extending payment terms beyond 30 days, newer financing options that leverage accounts receivable are gaining in popularity,” says Kenepp.