Taking out a business loan may be your first plan of action for financing business growth. But there are excellent reasons to consider other options for finding capital to expand your business.
For one, it can be very difficult for a small business to secure financing, especially in the early days. You’ll need to prove to a lender that you aren’t a high risk, with financial documentation that shows your company has been profitable for a few years.
When you take out a loan you’ll need to consistently make payments toward the principal, interest, or both, depending on your agreement. If for some reason you can’t make your payments, the problem can snowball from losing the assets you pledged as collateral to more devastating losses, including bankruptcy.
Consider these four ways to finance growth without approaching a lender for money.
Ask for pre-payment
This option is as simple as asking your customers to pay you in advance of receiving your products or services. Explain that you are changing your payment policies and your new terms are that you receive payment on the first of the month, at the beginning of a project—whatever works for you. As the owner of your business, you get to decide when and how much you need to be paid in order to deliver your products and services.
On a related note, you might consider using a subscription model for a new income stream. Some possible subscription-based services with a recurring pre-paid fee are:
- a password protected website offering valuable info and community for your customers
- a monthly service membership website (i.e. beauty, dry cleaning, home maintenance)
- box kits for DIY enthusiasts (i.e. cooking, crafting, and other hobbyists)
In addition to providing an inexpensive source of financing, crowdfunding allows entrepreneurs to gain market validation for a new idea before overinvesting—and provides an opportunity to market to potential new customers. You’ll be able to start selling before your new product or service is ready so you can continue to avoid the small business debt trap.
Form an alliance
Partnering with other businesses is mutually beneficial: each company can increase their sales by introducing each other’s products and services to their own customers at no added cost. You can potentially attract brand new customers, too, by increasing your range of offerings by way of your alliance.
Likewise, a marketing alliance is a simple strategy where two companies agree to spread the word about each other’s products and services with their customers. Each partner would earn royalties on sales to the other partner’s customers, bringing in easy growth revenue without any additional marketing or advertising costs.
As you move forward with your next phase of business growth—no matter how you fund it—be sure to touch base with a business advisor. Seeking the guidance of experienced business experts who can help you update your business plans, and choose the best strategies to cut costs, increase profits, and achieve your short and long-term goals, will lead to greater success.