So you’re ready to take your business to the next level–
Isn’t it exciting?!
But no matter how confident you are, financing your business expansion could make anyone anxious.
After all, you started a business to support yourself…
Now you’re thinking about taking on debt to support the business!
It seems counter-intuitive, but people do this all the time to seize growth opportunities:
If you’ve ever taken out a car loan to commute to a job, you’ve done it too.
And if your business has hit a growth plateau, taking on some healthy debt may be the fastest way to expand.
The key to doing this successfully is, of course, managing your cash flow effectively.
If you’re looking for ideas on how to improve cash flow in small business, this is a crash course on how to take your small business to the next level:
Step 1: Follow the Money
If you’re not sure where every dollar of your business comes from and goes to, you’re setting yourself up for cash flow problems.
It may seem like a waste of time to meticulously track expenses you have some understanding of them– but as your business grows, trust that its finances will only get infinitely more complicated.
Get to know your cash flow cycle like this:
- Track all expenses (from rent to lattes to contractor fees) for one month.
- At the end of the month, add in occasional expenses (quarterly taxes, bi-monthly bills, etc.).
- Compare your total with the revenue you brought in during that time period.
In a personal budget, there’s a simple calculation: if you’re spending more than you’re making, you need to spend less.
But in business, the solution is more complex.
Businesses can more easily tweak the earning side of the equation by using debt strategically to finance a business expansion.
Step 2: Cut Costs to Instantly Improve Cash Flow
This is the fun part…
Once you have the facts, it’s easy to see low-hanging fruit where you can cut costs.
There are three main cost-cutting strategies:
- Use less of something, or do without.
- Implement economies of scale; this can be hard for small businesses
- & Negotiate, negotiate, negotiate!
While the first two can yield some savings, the best cost-cutting strategy for small business owners is effective negotiation.
Here are some ideas on how to improve cash flow in your small business through negotiation:
Haggle with vendors & service providers to reduce business expenses
In business, the price vendors quote is generally seen as a starting point for negotiations.
Don’t be afraid to ask for a trial period, an alternative payment plan, or a flat-out discount.
Often, vendors will see this as an opportunity to demonstrate their value.
And if they truly deliver that value, you’ll be able to afford a higher rate when it’s time to renew.
It’s not hard to shop around for something like internet savings, and most providers would rather offer you a deal than see you leave.
If your provider isn’t willing to negotiate on price, ask them to throw in additional services for free.
Need to pay on an adjusted schedule? Want a six-month contract instead of the full year?
Want to build a bundle of services a company doesn’t offer off the shelf?
Learn to say “No” to problem clients & unprofitable requests
When you’re starting out in business, saying “no” to a client feels like shooting yourself in the foot.
But if a client demands more and more of your time without offering additional payment, your business isn’t benefiting.
While some “bonus” work can build goodwill and earn repeat business, too much extra effort sends the message that your time isn’t worth much–
A dangerous precedent to set.
Step 3: Consider New Cash Influx Methods
You can only get so far by cutting costs!
To take advantage of certain opportunities– like hiring employees, leasing a better space, or buying equipment– you need cash on hand.
The good news is that your options for financing a business expansion are varied, so there’s likely one that fits your need.
Research loans to expand your business & some other clever ways to bring in more revenue:
Small Business Credit Cards
Like personal credit cards, business cards give you access to money whenever you need it.
Used well, these can be great ways to build business credit, rack up rewards, and make day-to-day operations more fluid.
Accounting Automation Software
If your business is strong on paper but is struggling with cashflow, automation software may help.
Automating your accounting in particular can help keep track of unpaid invoices, send reminders to clients, and free up your time to focus on new sales.
Any tool that saves time is worth considering because every minute you spend on tasks other than growing your business is a minute you’re not bringing in revenue.
Payment Plans for Clients
If you work primarily on long-term projects, it’s easy to get into feast-or-famine cashflow cycles.
One fix is to offer clients payment plans:
Some money upfront, payments at regular intervals, and the remainder at completion.
This may be a relief for your clients too, as lump-sum payments can be stressful.
Bonus: Add a late payment penalty but present it as an “early payment discount.”
Anyone who pays on time pays your normal price and anyone who pays late adds five percent.
Now that’s genius.
Small Business Loans
Whether you borrow from a big bank, credit union, or from an SBA-backed fund, traditional loans are a great way to fund clearly defined expansion plans.
On the other hand, they typically require thorough documentation and may take a month or longer to be approved.
This handy borrowing device lets you use your accounts receivable as collateral.
Essentially, your lender pays you in a lump sum part of what you’re owed by clients.
When clients pay, you repay the lender on agreed-upon terms.
Step 4: Measure Cash Flow & ROI
In order to break out of a small business plateau with a loan, you’ll have to have a clearly defined debt strategy in place.
Look at your small business loan as an investment, manage loan funds with rigid discipline, and set benchmarks for success.
In other words, you’ll need to understand the ROI of a loan.
After making some the changes suggested above, wait 30 days and measure liquidity again.
Start over at step 1, tweaking your business model again and again until the numbers make sense.
After all, cash flow management is an ongoing process.
RELATED: How to Measure Liquidity of Your Business
The bottom line here?
Financing business expansion starts with knowing the cold hard facts about your business’s cashflow.
Just know this:
Trying to finance business expansion without having a solid debt strategy in place is a fool’s errand!