So now you have a good handle on your cost base, and you’ve decided that you want to invest further in your online business. Maybe you’ve spotted an acquisition you want to make (as we’ve discussed in previous articles) or maybe start adding new products or geographic territories. Or perhaps things are going so well that sales are growing too fast for you to stay in your current premises and you need expansion space.
Whatever the reason, it’s likely that you’ll have to find some additional funds to make it happen. Now it may be that you have enough profitability to generate cash as you need it – but as we’ve said before, don’t confuse profitability with cash generation.
So, if you conclude that you need to raise funds to grow then what are your options as an owner-managed online business?
In this article, we’ll be considering the more traditional routes and in the next one, we’ll look at some alternatives. Once again if you feel you’re out-of-your-depth, then make sure you get some appropriate advice.
Traditional Lending Options
Bank Facilities – you may be surprised that banks do want to loan money where there is a safe and profitable opportunity for them. Bank lending typically comes either in the form of an overdraft or a term loan.
As with personal facilities, commercial overdrafts are usually offered as a flexible facility with an upper limit. You borrow money as you need it and pay interest only on the amount you use. Interest rates are negotiable and often you may be asked to give a Personal Guarantee (PG) and sometimes even security –such as personal assets or property.
A Term Loan often comes with a better interest rate but is a fixed amount transferred to your business account and with early repayment penalties if you give it back before the term finishes. PGs and security can also be required by the bank.
In most cases, the lending institution will take a ‘Charge’ over the assets of your business and will require their money back before others in the queue. This Charge may also limit your actions before they give permission – such as other borrowings or selling off assets.
So while a bank can be a ready source of expansion capital, their approach may feel a little restrictive and heavy-handed for your business.
However if this looks like a route for you then don’t be afraid to go shopping for the best bank. Don’t feel you need to stick with your personal bank or the one you’ve always used for your business. Banks will compete for your business, and you may getter better deals with the smaller regional ones than you will, the larger national ones. You may also get a more personal service and also there may be special deals for local businesses that you can take advantage of.
Sales Invoice Financing
You may have heard the terms ‘Factoring’ or ‘Invoice Discounting’. Many banks will have subsidiaries or associate companies where they try to direct you. However, it’s unlikely that this type of lending will work for your online business.
Essentially the service works where you allow the bank to take control of your receivables by lending against future revenue from invoices. However, by their nature, most online businesses take all their money before they supply the product, and yours is likely to be no different. While this is great for cash flow, it doesn’t leave anything for sales invoice financiers to use as collateral.
Nevertheless, if you use your online site to sell products or services offer a substantial amount of credit to your customers then this type of service may still be one you can consider.
Many people dismiss the use of personal credit cards for expanding their business. Interest rates can be eye-watering, and it’s possible to rack up unintended charges if you aren’t disciplined. However, if you know that your need for cash is very short term, then it can often be an efficient and very flexible route. The credit card can either be used to purchase items you need for expansion or, if you have a good personal limit, you can draw cash against that limit and pass the interest charge onto your business.
This route is not for the faint-hearted, though, and it’s often wise to have a backup plan in case the period of the need becomes extended.
In the next article, we’ll look at some of the less traditional methods of generating expansion cash and how it may be possible to harness the needs of others to funding your business.