Financing an Expansion

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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In an ideal world, your business will earn enough money to cover the costs of expansion by the time you're ready to grow. In reality, unfortunately, most small businesses need some help financing an expansion. However, there are a variety of sources of financial help for most small businesses.

There are lenders and investors who work primarily with small businesses, as well as other strategies that can help you find the capital you need. While some people have the impression that the only lenders and investors interested in small businesses are the owner's friends and family, the truth of the matter is that there are a number of sources of capital for most business owners. It's just a matter of finding the right fit for your company.

Small Business Loans

The most typical method most businesses use to finance an expansion is a loan specifically for that purpose. David Lee's business, Greeno Products, recently obtained an SBA loan from Chase Bank. The company, first and foremost, needed a line of credit in order to cover transactional costs. Because it can take up to three months for a single transaction to reach completion, Greeno Products didn't have the cash flow necessary for flexibility or expansion.

Before deciding on taking out a loan, Lee and his partners discussed alternatives. "In the beginning we were considering adding additional capital ourselves (amongst the three existing partners). However, we knew we had built enough credit and enough time had lapsed (1.5 years) to qualify for an entry-level small business loan (like SBA) so we took a shot and it worked."

For Greeno Products, the loan application process was "pretty painless," according to Lee. "I called my bank where I have all my accounts and asked for the business relationship manager. Then she took down some preliminary info over the phone. After we finished filing our 2009 taxes in 2010, I submitted all the paperwork to the bank and within two weeks I was approved for a SBA line of credit."

Whether obtaining such a loan will be so simple for other small businesses depends on either the credit score of the business or, if it's a relatively young business, the owner's credit score. The Small Business Administration does offer a guaranteed loan program, which makes it easier for banks and other lending institutions to offer loans to small businesses by reducing the risk to those lenders. The programs offered by the SBA vary, as do the requirements for each different loan program, but your current bank can usually guide you through the application process. Some banks and other financial institutions other business loans beyond those guaranteed by the SBA, as well.

Investments

Accepting investments in your company may be tougher option. Not only do you have to find investors, but you have to be willing to give up at least part of the control in your company. However, such an option may provide one of the more financially acceptable. After all, with an investment, you do not need to repay a loan, although you do have to share the business' profits.

Depending on your business, your investment options may vary. For many small businesses, working with a local investor you've already connected with is the simplest approach. However, for some businesses, strategies like seeking out venture capital may be more effective. It's important to look closely at your industry and your plans before deciding what sort of investors you're willing to work with.

Crowdfunding

The options for financing your business' growth have taken an interesting turn over the past few years. While traditional methods are certainly good choices when it comes to finding money, crowdfunding may also be worth considering. Growing out of the idea of crowdsourcing, many businesses and individuals have begun to turn to their networks for financing, relying on a strategy known as crowdfunding.

Brandon Mendelson runs Earths Temporary Solution. Because of a problem with his credit, crowdfunding was a more feasible option than trying to get a loan from a bank, at least when it came to funding an expansion of Earths Temporary Solution and to take on new projects.

Mendelson points out that the idea of crowdfunding is not necessarily new. "Crowdfunding has been around for a long time (ever borrow a few dollars from your friend?). Seeing that it would be difficult to find sponsors for some of my earlier projects, we decided to just collect money from our friends and volunteers, first offline and then online. So I had actually been doing crowdfunding for a while without realizing there was an official term for it."

There are a number of tools and platforms online now that can help with the crowdfunding process. One of the reasons that such a platform could make sense is to provide you with a wider reach than your network currently allows for. Mendelson chose not to rely on one, however: "You can easily do it yourself and not have to split the money with anyone. Especially if you are investing the time you should into nurturing and growing your network. Like anything with business or life, it really comes down to who you know. The difference today, because of social networks, is who you know well enough to the point where they're going to step forward and assist you, not just hang back and act like a useless spirit squad."

Mendelson was able to fully fund his expansion through crowdfunding and notes that, for future funding, he'd certainly use crowdfunding again. "Out of all the things you hear about how the crowd can allegedly help you, crowdfunding is the only proven, effective one. With crowdsourcing you get what you paid for, and the crowd isn't as wise as some books like you to think. Large group decisions almost always breed mediocrity, and no business or organization can survive today on mediocrity, no matter how many people helped to come up with it."