7 Types of Finance to Expand Your Business

Finding the right finance options for your growing business can be a stressful scenario, but this article will give you a good insight into where to start.

Featuring 7 Types of Finance you might consider for your business evolution, we outline which types of finance suits whom and the considerations you could make before deciding on the right one for you.

Because (sadly) money trees aren’t actually a thing, your decision to expand your business will usually require some form of finance.

There are several ways you can go about raising the funds you need to make your business expansion dreams a reality, and this article covers off on 7 types of finance you should consider if scaling up your enterprise is on the cards.

Personal investment

Chances are this is where it all started. Most business owners kick off their business by tapping into their own personal finance reserves to get things off the ground.

You might have saved a sum of cash at the outset or perhaps even used an inheritance or sold an asset to fund your initial start-up, but very few business owners are able to fund their business expansion needs continuously, from the depth of their own pockets.

Nevertheless, if your expansion plans have a clear cost requirement and you have the means to use your own existent personal funds to invest, this is a very real and very simple option.

Just ensure you’re not placing yourself or your family under financial duress to do so.

Love money (family, fools, friends)

There are few people more invested in your business success than your family or close friends and associates. If you have the right people in your circles, they’ll want to see you succeed, but whether they’re willing to open their own wallets to see this happen is another thing entirely.

Several successful business-people were funded by their friends and family before they made it big. Eg. JEFF BEZOS, AMAZON

The first initial start-up capital for Amazon.com came primarily from my parents, and they invested a large fraction of their life savings in what became Amazon.com. And you know, that was a very bold and trusting thing for them to do because they didn’t know. My dad’s first question was, “What’s the Internet?” Okay. So, he wasn’t making a bet on this company or this concept. He was making a bet on his son, as was my mother. So, I told them that I thought there was a 70 percent chance that they would lose their whole investment, which was a few hundred thousand dollars, and they did it anyway.

While funding a business expansion or even start up via “love money” is a real option like in the case of Jeff Bezos, it is also one fraught with peril. For many, the old adage of “don’t mix business with pleasure” could apply here and oftentimes it is better to leave your relationships and friendships outside the sphere of your working life to protect the relationship and not muddy the waters with loans or expectations.

Venture capital

Funds derived from a pool of investors is often referred to as venture capital, and if you’re going down this road, you’ll need to have your paperwork in line before you considering making any applications.

Successful venture capital injections have assisted businesses in their scale up phase to expand their plant and equipment, hire necessary staff, improve products or launch new ones and undertake marketing and advertising opportunities.

There are a plethora of firms specialising in venture capital these days, usually run by a group of investors or investment conglomerates who see the potential in certain businesses and offer their investment for eventual gain.

The eventual gain bit is the clincher.

Don’t forget that any venture capitalist who invests in your enterprise will usually walk away with a percentage ownership of it. That means they bear the brunt of bad times, just like you, but they reap the rewards of the highs too, possibly forever more.

Be sure to seek legal advice before signing venture capital contracts if you’re looking into this step to ensure you cover all bases for your own and your businesses best interests.

Angels

Similar to venture capitalists; investment angels trade an injection of cash into a business for the purposes of expansion for a share of that business.

The only difference is, investment angels are usually individuals, not a collection of investors.

Angel investment options are on the rise in Australia with plenty of wealthy investors willing to bank on certain businesses in a similar way to obtaining stocks in a company.

However, angel investors may require an operative role in the business post investment, which means they could become your “business partner” of sorts and be able to call the shots when it comes to making decisions in the future.

Again, if this option is on your agenda, your best bet is to seek some legal advice about how to protect yourself and your business.

Business Incubators

Receiving funding for your business via a business incubator usually requires you to join an incubator program with other businesses in your area.

If you have been running your business from home or the garage, a business incubator can be a great option for expansion as incubation programs usually include some sort of office or warehouse spacing.

This physical space can be a total game changer for businesses and depending on where your incubator program is located, you may have access to entirely new markets, networks and support and services you previously have not.

Incubation programs are usually run by Government or public institutions, but there are some privately-owned incubators run by investors who wish to take a more “venture capitalist” approach to their investment in your business.

Another great benefit of business incubator program is the potential connections you can forge with other businesses involved in the program. There’s often nothing better as a business-person than finding a group of people you truly relate to – it can offer a huge boost in morale.

Government grants & subsidies

An, often underutilised but highly competitive, form of funding is government grants and incentives – available to businesses from local, state or federal tiers of government with the aim of stimulating business activity.

Government grants can be as little as $2000-$5000, but this can go a long way for a business with a short-term growth goal and many grants can be as much as $100,000 to $500,000, which can work to completely revolutionise a business and put its scale up plans into gear instantly.

Government websites often advertise available grants but be sure to check out possible Research and Development grants available through universities and other higher education facilities too. And don’t forget any tax breaks that might be available to you!

Grant applications can be a bit tedious, but the payoff can be worthwhile.

Bank debt

Last, but not least, business and personal loans are available for business owners and individuals from most banks and lenders.

If you’re going down this path, it can help to get a broker to help you sift through all of the possibilities and weigh up the types of costs involved with certain types of loans, and whether or not your current business activities can service the loan repayment requirements.

Be sure to check carefully if your personal assets, like the house you live in and the car you drive, are connected to the loan you are taking out – for some business owners this may be ideal, but for many, it won’t.

Finding the right form of business funding for you will be a personal solution, balanced on a number of variables unique to your business and you.

There are no ‘one-sized fits all’ approach and it pays to do your research thoroughly before deciding on the type of funding that fits.

If you find this world a little overwhelming and do not know where to start, reach out to us for a chat, we’re always happy to explain these options to you further or steer you in the right direction.

*Ingredior is not a financial planner, broker or institution. Information provided in this article should not be considered legal advice, we recommend speaking with your lawyer (or seeking one out) and your accountant before making any decisions on your business and personal circumstances.

Thoughts:

With so many options available to you, finding money to expand is certainly achievable, it is deciding which option is best for you and your business’s future that is the important factor.
Having your business strategy to hand can assist in making expansion funding choices, who you want involved in your business short, mid and long term according to your business strategy will determine the type of funding you might seek out.
Finding and securing funding your business can take time, you will need between 6-12months planning and lead time for some of these options. Consider time in your decision making as it might be something you are not in surplus of.

Test this theory:

As a quick activity to get things started, create an excel document to map these options as best you can;
- You would consider each funding option (columns).
- You would also consider the positives and negatives of expansion funding, using the above points under funding option as a guide (rows).
- You would then go through and ‘tick’ or highlight which rows apply to each column based on your business and personal circumstances.
- This would help guide you on potentially the most appropriate type of expansion funding for your conditions.