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How To Finance Business Growth: Savings Or Capital?

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How To Finance Business Growth: Savings Or Capital?

Updated: April 1st, 2020

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Deciding you’re ready for business growth is an exciting milestone to reach. Maybe you’re preparing to develop a new product, hire a project manager, or open a second location. Whatever your plans, you need money to execute them. 

As a business owner, you have plenty of options for funding, but most of them fall into one of two categories: savings or new capital. To finance your business’s growth initiative, you can either use company cash or apply for a business loan. 

Before you choose a direction, it’s crucial to consider which option best supports your business’s goals and finances. Let’s take a closer look at what it means when financing business growth with savings or new capital. 

Financing business growth with savings

If you’ve been running your business for a while and have accumulated substantial working capital, you may be able to fund a growth project with your own money. To figure out how much cash you’re working with, you need to review your cash flow statement and balance sheet, as well as calculate your working capital ratio. Consider consulting your accountant to go over your numbers and discuss options. 

Benefits of using your savings to finance business growth

When you go this route, you get to reinvest the cash you’ve saved into growing your business. You also don’t have to take on new debt to make your dreams a reality. Sidestepping the loan application and approval process can save you time and energy. Not to mention, this means of financing growth can give you more control over your funds. Instead of relying on a lender, you can work directly with your accountant to allocate money toward one main project or several different initiatives. 

Downsides of using your savings for financing growth

One of the disadvantages of using company money to fund a growth project is that you may not have enough cash to achieve what you want, let alone cover emergencies or unforeseen costs. You may also end up using more money than you planned, leaving few funds left over to pay for operational expenses or inventory after you finish your project. 

Plus, you’ll also have to work on building a new cash reserve, which can take time and sacrifice. And though you won’t have to wait for a lender’s approval to get financing for growth, you also won’t receive the guidance and support many lenders offer their borrowers during the funding process. 

How to finance business growth with new capital

If you don’t have enough working capital to execute your growth project, or if you want a specific type of financing, you may be considering a business loan. There are many small business loans available, including equipment financing, lines of credit, and term loans. The loan you choose for financing growth will depend on your business’s financial health, funding needs, and goals. 

Benefits of using new capital to finance growth 

When you apply for a business loan, you typically have access to more funding than you would if you reach into a cash reserve. A more substantial amount of funding can give you the freedom to take on a more significant project, like relocating your bakery to a more popular shopping center or opening a brick-and-mortar store for your e-commerce shoe shop. 

Plus, you get to maintain whatever savings you’ve accumulated to use for emergencies or obstacles. Depending on the lender you choose, you can also get flexible repayment terms. Obtaining a business loan also gives you more time to transition into a new phase or complete your business growth project without having to stress about finances. 

Downsides of using new capital for financing business growth

When you use a business loan to finance growth, you’re taking on new debt, which means you’re responsible for making repayments regularly with interest. If you don’t actively budget and plan wisely, you can unintentionally set your business back financially, making it difficult to get ahead in the future. 

On a practical level, applying for a loan also takes time and effort. If you opt for a bank loan or a loan backed by the Small Business Administration, you may have to wait several months to hear a response. Plus, traditional lending institutions like these approve small business loans at a lower rate than alternative lenders

3 questions to ask yourself during the funding process

Before you decide how to finance business growth and which is right for you, take time to evaluate your needs and goals. Try asking yourself these three questions to arrive at a decision. 

1. What do your business finances look like?

The state of your business’s finances determines whether or not you can fund a growth project yourself, so it’s important to begin here. Make an appointment with your accountant to review your cash flow, assets, debts, and profits. It’s also a good idea to evaluate your projected sales and revenue history to ensure you’ll have enough money coming in for the growth project to cover the cost of operations. You also need to set aside contingency cash in case a crisis strikes

If you have enough cash to invest in a project, and if your sales forecasts look healthy, you may be in an excellent position to self-fund your business growth. On the other hand, if cash is tight or if your revenue has fluctuated over the past year, it may not be a smart financial choice to make that leap. 

2. What are your business growth goals?

Consider your goals for growth or expansion. Do you want to add to your sales team or renovate your storefront? Determine what’s most important to you, then crunch the numbers. Make sure you figure out the estimated cost of realizing your goals, as well as the projected return on investment from your efforts. Pinpointing the cost and potential payoff of a particular endeavor gives you a better idea of whether or not it’s worth your time, energy, and money. 

If you think you can reach a business goal without stretching yourself financially, go for it. On the other hand, you may need a more considerable sum of money to achieve your goals and keep your finances stable If this is the case, a loan may be your best bet for financing business growth. 

3. What is your timeline? 

Finally, consider your timeline for executing your business growth plans. You may have a long-term vision, aiming to buy another business within the next 10 years. Or, you may have more immediate needs, like hiring a salesperson within the quarter or launching a new product in the next six months. 

Your timeline will play a role in determining the financing that’s best for you. If you want to begin your project right away, you may not be able to wait for approval from a traditional lending institution. However, if you can afford to wait a few months for funding, then applying for a business loan may be worthwhile. 

Find your ideal loan for financing growth

If you think a term loan could help bring your business to the next level, consider Funding Circle. Funding Circle term loans are designed for business owners who want to grow their customer base, expand operations, or otherwise build upon their success. You can apply in just five minutes and hear back in as little as 24 hours. Learn more about us or see how we compare to other lenders

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