Perhaps you’re the proprietor of a relatively new neighborhood coffee shop, restaurant or retail store that’s doing extremely well. Or maybe you have a food truck and can barely keep up with demand. Time to expand?
If you have a strong feeling that your business can be at least as successful as your flagship location, and you want to open up another store (or acquire another food truck), then what’s the best way to raise money? How can you find the capital necessary to fund expansion?
Should you ask your parents? Your friends? Should you liquidate your own assets? How about taking a small business loan? Are investors knocking at your door, wanting a piece of your potentially-lucrative pie?
Actually, before determining the best strategy and sources for raising money for expansion, ask yourself the following question:
Even if your current brick and mortar anchor is swimming in the black, do you realize how much you’ll need to raise to invest in growth? To prevent dipping into your current location’s revenues, will you be able to raise enough to invest in new equipment and employee training, and to pay for at least a few months of rent at a new location?
There might be a period of a few months before you realize any net profits from opening a new location. Can you weather this temporary net profit freeze?
Choosing the best source of funding for expansion
Most of the time, the best source of funding for expansion is the same one(s) you used to start your business, if you did receive external funding.
And now that you have a proven track record, it’ll be much easier to pitch expansion than it is to convince others that a start-up will work.
The majority of small-business owners rely on personal sources for financing expansion. Personal and family savings sources include personal lines of credit. Using a credit card to finance expansion is an example. However, interest rates can be expensive).
Another option is funding growth through a home equity loan. But make sure your expansion is a virtual shoe-in to be successful otherwise you can lose your home if you can’t repay the loan.
You can also dip into your individual retirement account (IRA). Great news, if you can replenish the amount you withdraw within 60 days-you pay no penalty. The bad news is that it can take a few
months before an expansion becomes profitable, and there’s a 10% penalty plus taxes if you don’t replenish the amount you withdraw within the 60 days.
Got Life Insurance? Use the Cash Value To Fund Expansion
There’s also the option of taking a cash-value life insurance loan. Life insurance has evolved from a product that merely provides a death benefit to a beneficiary. If you have a life insurance policy that provides cash value, such as a whole-life policy or universal life insurance, your policy may include a loan provision, according to TheBalance.com.
However, before you borrow, ask your agent to run an “in-force illustration.” An in-force illustration will show you how your loan will impact your policy.
Small Business Loans
According to this article on Entrepreneur.com, each day more than $50 million in SBA (Small Business Administration) loans are provided to U.S. small businesses.
And the best way to get approved for an SBA loan, suggests Entrepreneur, is to strike up a relationship with a loan officer at your local bank or credit to discuss which SBA loan program would best suit your needs.
For example, there’s the SBA’s most popular loan, the 7(a) loan program, for which, you can get approved for up to $750,000 from a local lender. The SBA doesn’t provide the loan directly; a local lender provides the capital. But where the SBA steps in is that the organization minimizes the risk for a local lender by providing different financing options.
You can also check your local bank for other loan options.
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