Our Blog

The finance behind your business expansion

“And the day came when the risk to remain tight in a bud was more painful that the risk it took to blossom.” – French writer Anais Nin

Your business has weathered the J-curve of the startup phase and come out strong. Sales and margins are stable and healthy. You’re faced with an option: either plateau, and sweat your assets, or continue to expand. The latter will allow for economies of scale to kick in, and take your balance sheet to a whole new level. So you’re going to go for it: you’re considering business expansion.

There are various ways to achieve your goal, ranging from the development of a new product to opening a retail outlet in a new country. But no matter what the identified plan of action is, there are always financial considerations to be made. Often, your company will need to raise capital before it can implement its ideas. Finance should be the driving force behind your business expansion strategy. A well-considered financial skeleton will allow you to move confidently into untested waters. Below are some ideas to consider as you ponder your business growth plan.

  • Crowdsourcing – getting donors on board:

    An increasingly popular way to raise capital for your expansion venture is to get on your virtual soapbox. Crowdsourcing, or crowd funding as it is alternately called, is a way of attracting “donations” for your business idea. You throw the net wide by appealing to as many potential funders as possible using social media tools. The biggest international crowd funding website, US-based Kickstarter, helped raise more than R3.2-billion for over 18 000 companies last year. Similar local websites such as startme.co.za allow donors to give donations as small as R50. The project or business owner sets a time limit by which an agreed-upon amount of cash must be raised. Only those that raise the money within the stipulated timeframe actually take any money from their donors at all. The funders do not act as investors, inasmuch as they do not take a stake in the business. But it is common for the project owner to promise various ‘rewards’ in exchange for cash. These can range from things as tangible as a free version of a product being developed, to as abstract as a performing artist mentioning the name of a donor during a live performance.

   The secret behind any successful crowdsourcing endeavour is to be a master persuader. Sketch a vision of your business    expansion that is so compelling that it gets donors wanting to join the movement. If your idea is catchy and you connect    with the right audiences, you could see roaring success. One of the most popular projects to date (which produced glow-    in-the-dark plants) raised R5-million in just 44 days. But in case this sounds like money for jam, be under no illusions.      Dedicated crowdsourcing is hard work. The volumes are high and the amount earned per donor is small. This solution      is only effective for products that have instant, broad appeal to a large audience that has discretionary cash and is                  motivated to be part of your business expansion idea.

  • Equity for cash: 

    Carefully consider whether you are looking to attract new business partners or shareholders. Your ideas for business expansion might be revolutionary, but are the potential returns worth the risk and loss of income that comes with giving away part of your business to get there? Other institutional considerations come into play as well. For example, will your new idea for growth require your company to meet certain minimum broad-based black economic empowerment (BBBEE) levels in order to attract the desired business? If so, with the new, more stringent BBBEE requirements in place, bringing on new partners might be a necessity. Exchanging equity for cash may be a way to meet those needs and bring in capital for business expansion at the same time.

  • Securing a loan:

    Alternately, you might be so confident of your prospects for growth that you deem it prudent to take out a loan. If so, ensure your business plan is sound and compelling enough to attract the loan you need at an affordable rate. As part of your preparation for approaching banks, carry out your own scenario planning to ensure you can answer the questions that are fired at you. If the interest rate offered on your loan is higher than you had hoped for, reassess. Your dreams of business expansion should not come at the mercy of mercenary bank fees.

If you need assistance in working finance into your business expansion strategy, The Finance Team has a number of experts who can assist. One of our qualified, experienced financial professionals can help you plot a course to attract the finance that is appropriate for your growth plans.

 

CTA2

Can executive headhunters find the right executive for your firm?
Four tips on optimizing your working capital