If your business is on solid ground and you’re looking to expand, you’ll need to finance that growth. Expansion can involve a lot more than growing your customer base. It can mean tackling new markets, buying more equipment, offering new products, hiring employees and more. All of this requires money. But where can you find the required financing?
Retained earnings are company profits you keep in the company instead of paying yourself and other shareholders. It is very common for businesses to expand via retained earnings. The advantage is you don’t need to look for outside sources for financing and possibly give up equity. The disadvantage is that the speed at which you can expand is limited to the amount of available company cash.
Raising money through equity investment means exchanging partial ownership of your company for cash. There are various ways of accomplishing this:
Investment From Within
If you bring in people to run the business with you, you’ll probably have them buy either a partnership share (if your business is not incorporated) or shares in your company (if your business is incorporated). After all, you did all the hard work and took the risk getting the business off the ground, it’s only fair that a new partner buy in. This will bring in some cash you can use for your expansion plans.
Incorporated businesses can also sell shares to employees. This brings in capital and has the added benefit of giving employees more incentive to to work hard to increase profitability. A downside with giving up significant share is that even if you make sure to keep at least 51% of the shares, you may still end up in conflicts.
Newer startups are often cash strapped. It can be difficult for these companies to afford the needed expertise. If this is your case, you may choose to bring in partners with needed expertise and trade shares in the company in exchange for work done. Otherwise known as “sweat equity”. The benefit is that you don’t have to pay cash up front for work done and the new partner shares in the risk. The downside is that if your company takes off, the equity you gave up might be worth a lot more than what it would have cost you to pay in salaries.
Angel & Venture Capital
It’s often easier to get financing from angels and venture capital once your business is out of the startup phase and has steady earnings. These investors often prefer to help businesses increase production and/or market share because it’s perceived as less risky than funding an unproven startup.
What exactly are angel investors and what is venture capital? Take a look at our “Sources of Financing” article for details.
Your country of operation might have laws that can limit the number of outside investors that are allowed to have shares of your company. In the U.S. The U.S. Securities Exchange Act of 1934 generally limits a privately held company to fewer than 500 shareholders. In Canada, securities laws let a maximum of 50 people who aren’t employees own shares in a private company.
If you want to raise more money beyond what the limited number of investors can provide, you’ll have to “go public” or make an “IPO” (initial public offering). This means shares in your company to the public. The shares can then be traded between investors on a public stock exchange like the NASDAQ, NYSE or TSE.
A word of warning, an IPO is expensive and complicated to set up. You’re not guaranteed to get any money out of it and you’ll have to comply with regulations that private companies can avoid. As such, many owners prefer to stay private, and expand in other ways.
As with securing venture capital, loans are often easier to obtain for a business that has been running for a while with a good financial history. Banks, loan, trust, insurance companies and credit unions will often lend money to businesses. Additionally, governments sometimes have programs to guarantee loans for small businesses.
Sale & Leaseback of Equipment
If you already own business equipment, you can free up cash by selling the equipment and leasing similar equipment. Leasing companies will buy your equipment and lease it back to you. Of course, If you don’t really need the equipment at the moment, you can just sell it off. Any of these options will provide some extra cash.
For more information, please refer to our article on sources of financing.