5 tips for financing your growing business

1. Understand growth financing

What is growth financing? It is simply a business loan providing the capital necessary to carry out a project that would increase your company’s bottom line.

“This sounds simple, but it involves many different types of projects, from acquiring a competitor to upgrading a technology. Really, anything that will spark revenue and profitability,” says Christopher Daigle, Account Manager, Small Business, BDC.

The most important reason to finance a growth project with a loan is to protect your cash flow, explains Daigle. By financing a big-ticket investment, you are spreading the expense over time, which helps protect your cash reserves, at least at the beginning.

“It allows you to keep cash for unexpected expenses, like a broken truck, which is a good thing because it’s always hard to get quick financing when you’re in a desperate rush.”

2. Choose the best sources of funding for you

What are good sources of funding for business growth? It is important for you to ask this question because there are a number of different financing sources.

Banks are an obvious option. However, every bank has its own variety of financial products, risk tolerance, and most importantly, approach.

“At BDC for instance, we take on fewer companies than a typical commercial bank, but we spend more time helping them with their projects, and we focus on the strength of the relationship,” says Daigle.

Beyond banks, federal and provincial governments also provide growth financing, and sometimes with favourable terms and conditions. Regional development agencies, for example, offer financial and technical support to businesses across Canada. Some programs are designed to help companies reach new markets, and others are intended to help them modernize their equipment.

Industry-specific organizations are another good source of growth financing. Farm Credit Canada, for instance, provides funding for agriculture and food companies across the country.

Finally, consider asking vendors to finance a purchase. Many are willing to offer loans or special terms if it means a sale—a win-win for the supplier and for you.

3. Explore your options—and pick the best one

When evaluating your financing options, keep in mind the following criteria:

• Cost of money
  Is the interest rate competitive, and is it realistic in the context of your company’s metrics? How will it impact your cash flow and profitability?
• Terms
  Can you repay your loan more quickly, if need be, without penalties? Do you need to repay within four years, or ten years?
• Conditions
  Some banks may impose conditions pertaining to your financial performance. They might ask, for example, that you keep certain ratios under a given value, or else they will ask repayment or levy penalties.
• Personal guarantees
  Certain financial institutions may offer your business a loan, but will also require you, the business owner, to be personally responsible for your company's debt in case of default.

4. Moderate your growth rate

Quicker growth is always attractive, but it is not always or even often the case.

“Hockey stick growth is not always great news. Yes, your sales are going up fast, but can your business keep up with it?” says Daigle. Growing sales means spending more on raw materials, labour, and inventory, but if you cannot collect on your account receivables quickly enough, you might face a cash crunch and need to stop production.

It is often better for a business to target a slower, yet consistent growth. This will make it easier for you to plan, whereas explosive growth will put your company in a reactive position.

“It will also help you find cheaper financing,” says Daigle. “Fast growth requires more money, quicker, and it is also riskier, so you end up paying much more to borrow than if you go steady and slow.”

5. Don’t fail to plan, plan to succeed

Elaborate a financial plan for your upcoming investments, preferably at the beginning of each year: Work out how much financing you’ll need based on your growth projects, and meet with your financial partners early on to discuss what’s coming up. Don’t forget to brief them about your needs for the coming year.

Keeping in mind the goals your have for your business this year, your plan should contain achievable steps to reach your objectives.

“You want to increase sales by 10%? How will you do it? What metric needs to increase? Will you need to hire? To develop a new market? To increase efficiency? Which products will you target for a sales increase?” says Daigle.

Being prepared will make a favourable impression on your bank and account manager.

Next step

Learn how to prepare a winning loan request with our guide for entrepreneurs: How to Get a Business Loan.