Dear Dan: Our young business is stuck in a rut. We’re into our fourth year and are modestly profitable, but haven’t quite got the means to take ourselves to the next level of growth. What are some ways to finance an expansion? – Expanding
Dear Expanding: A business that has at least three years of operating experience under its belt, a proven plan, experienced management in place – and is currently profitable to boot – has a tremendous edge over startups in the struggle to raise capital.
Here are some of your top choices:
1. Bank loans with SBA backing: Business loans made with the backing of the U.S. Small Business Administration funnel billions of dollars of expansion money to small firms – from “micro loans” of up to $35,000, to millions. To learn more, go to www.sba.gov and look at the “Financial Assistance” section under “Services.”
2. Business lines of credit are a great way to finance expansion. Lines of $100,000 or more are relatively easy to set up with an existing business and good credit, and cost little or nothing to open. Once established, the line can generally be used for expansion as needed, so you only pay for the funds you actually use.
3. Venture capital: While VC funding is rarely an option for startups, fast-growing young businesses with a good plan and major potential can catch the eye of venture capitalists. But venture money won’t likely come in the form of a loan. Instead, you’ll be giving up a portion of the business in return for the cash, so current owners must be prepared to make that choice.
The National Venture Capital Association offers a free online venture capital directory at www.nvca.org, or visit the vFinance portal at www.vfinance.com.
4. Angel investors: The growth of angel investor groups has brought a more organized approach to the field of angel investing. Angel money has been flowing, and while many are geared to startups, there’s also interest in financing expansions. As with venture capital, you’ll be giving up shares in the business in exchange for the funding. The Angel Capital Association is a great resource, at www.angelcapitalassociation.org.
5. Home equity line of credit: Many a startup has been financed by credit card, and this is as variation on the same strategy. If you own a home that’s worth a lot more than you owe on the mortgage, banks are eager to lend money against that equity at interest rates as low as 6 percent. What’s more, the interest is tax deductible.
6. Internal cash: Tough to come up with, sure, but if you reconfigure your finances you might be able to free up funds to expand. If you need vehicles, technology, space or equipment, for example, lease financing is a good option. •
Daniel Kehrer can be reached at editor@business.com.
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