7 Ways to Fund Your Business Expansion Without Bank Loans
Expansion in business is driven by the ambition for more profit. Profit is why businesses are what they are, businesses.
Every business has an aim or goal to grow. Growth in scale and scope could be specific (targeted) or general. General growth looks at the overall increase, in scale and scope, of the business. For instance, a business that seeks to expand in other locations will have to replicate almost all of its operations in the new business location. Growth targeted at a particular aspect of the business is specific growth. If a business, for example, is producing more than it is selling, it is imperative that the business expands its distribution network.
Business growth requires funding and this funding can be obtained from the internal or external business environment. Not all funding is suitable for every business, so it is important to go for the funding source that best suits the company. Aligning the business to the right source of funds, the cost of which the business in its growth can accommodate, becomes an imperative task to carry out for the expansion of the business to be worthwhile.
Explained below are seven ways through which a business can source funds for its expansion.
This type of funding comes with almost no cost and there are no conditions attached except for the ones that are personally imposed. Personal funds could be through;
- Savings: Funds reserved over time can be absorbed into a business for its expansion. These funds could be from salaries, profit sharing, earnings from other ventures etc.
- Retirement Savings Account (RSA): Deductions from salaries and other earnings for future retirement are kept in an RSA and can be accessed upon retirement. However, this can only happen when you have a very good retirement savings plan.
According to UK-based financial experts MoneyandHome.co.uk, “Letting your savings grow is a very powerful tool that you can harness in the future, but the hard part is nurturing the will power to decide to stick to your saving program when you start seeing how much you’ve accumulated over a period of time.”
Family, friends and acquaintances can also fund the expansion of a business. They would do so out of their own good will, which, more often than not, comes with little or no cost. Funds sourced from good will come from the personal funds of the source persons - whether family, friends or acquaintances. These people already know the business owner(s) and the goals/objectives of the business and, therefore, need little or no pitch to get them to fund the expansion. Non-availability of these kinds of funds is only when family, friends or acquaintances do not have readily-available funds.
Businesses retain some of their profits for expansion or growth purposes. A basic textbook definition of retained earnings is the net profit of a business in a given period of time minus dividend pay-outs and other commitments to investors.
Another form of retained earnings is the shareholders’ dividend reinvestment. In this case, their investments are valued either at discount rates or at prevailing market prices.
Another source of funds for business expansion, other than bank loans, is to take credit supplies. Credit supplies do not require immediate payment. Trade credit has the grace of no payment which a business enjoys from its supplier for a set time period. The funds generated from the sales or utilisation of these supplies can be channelled into expanding the business.
These are individuals or a group of individuals who are affluent and make funds available for business owners to expand their businesses. This is usually not without returns. The appendage “angel” suggests that these investors are more interested in the success of businesses with a worthy cause than in whatever returns are inherent in their investments. Angel investors invest their own personal funds, which may be from their trusts, foundations, businesses or from other means owned or established by them.
A venture capital is the funds businesses receive from firms or other individuals of high worth. These sources are known as venture capitalists and they only invest in businesses that are considered to have a high-growth potential or have demonstrated such growth. Venture capitalists are different from angel investors in that their investments are usually exchanged for equity and there must be a solid exit strategy in the short or mid-term. Venture capital can also be in the form of technical assistance or managerial expertise.
Initial Public Offering
A business seeking expansion can raise more than enough funds through the Initial Public Offering (IPO). The IPO is the offering, for the first time, of the stocks (valued as shares) of a business to the public in exchange for capital (which is interest free) at the stock exchange. Members of the public who buy these shares become shareholders in the business and will enjoy a certain amount of returns in dividends from the profit of the company.