Business expansion often means something different for every small business. Whether you want to open a new location or add new products or services, it’s important to properly prepare to ensure your small business grows successfully.
In this article, you’ll learn the five common business expansion issues and steps you can take to avoid them. These steps will help you prepare your business for expansion and significantly increase your chances of success.
1. Expanding for the wrong reasons.
Some businesses may decide to expand when they’re not doing well financially, or as a reaction to changes in the market. Others attempt to build top-line revenues without understanding the impact on their bottom line. While growth is critical for the future of your business, pursuing it without a sound and well-considered plan can lead to more harm than good.
Similarly, you may decide to open a second location before you’re ready, thinking that doubling the number of locations will, in turn, double your revenue. Unfortunately, this can hurt your chances of getting approved for a loan to fund the expansion. Lenders need to see net profits from your first location because running two locations of the same business takes more time and energy, and you’ll need to focus on building the second location’s business to the break-even point.
Solution: Assess your motivations and goals
There are many reasons why growing your small business may be the right decision. Before rushing into expansion, it’s important to evaluate your reasons and determine if they align with your long-term and short-term business goals. Consider bringing in a third-party consultant for an outside perspective on your expansion plans.
2. Expanding your business before building a team.
Expansion requires a lot of hard work and commitment from all team members. For this reason, you may choose to hire new staff to take on the increased workload. However, you don’t want to jumpstart the process without fully evaluating what positions you need or considering the true costs of employment. This can lead to significant financial costs, as well as ineffective team members who are not prepared to meet the challenges of expansion.
Solution: Create a growth plan to help you evaluate your needs
Before starting the hiring process, take the time to assess your current team, consider the costs of hiring, and determine what new roles will make the biggest impact on your business. One helpful tool is to create a growth plan to assess if your business is ready take on additional team members. You can ask for feedback from your accountant, attorney, or even your customers – they’re all great resources that can identify areas of concern and find additional opportunities.
3. Ignoring the full financial picture.
When creating expansion-based financial projections, you may tend to focus on the assumptions behind rising revenue and gross profit margin. Expanding a business creates a whole new set of expenses and financial factors that need to be considered. If your financial projections fail to reflect the full range of additional expenses, the expected improvement in profit margins can be eroded significantly.
Solution: Look beyond revenue and gross profit
Your estimates for overhead and fixed costs should consider additional staff, equipment, space and the financing costs associated with any funds borrowed for the expansion. Review your projections for the full picture and determine whether or not this is the right time to expand your business.
4. Missing a backup plan.
As with most things in life, business expansions rarely play out exactly as planned. Sudden, unexpected expenses and challenges are common during expansions, and unfortunately, can sink a business that’s not prepared with a contingency plan.
Solution: Identify possible scenarios and create backup plans for each
For your expansion plan, always run three scenarios: base-case (or baseline scenario), best-case and worst-case. Aim for the best-case, but know what your contingency plan will be if your business runs into the worst-case scenario. This may include access to backup sources of cash, identifying assets that can be quickly liquidated or scaling back your growth plan.
5. Insufficient research on funding options.
One of the most significant issues that many business owners face when expanding is insufficient capital. If you don’t do your homework to identify the types and amount of funding you need and the best lending sources for them, you’re at risk of taking on high-cost loans that can leave your business struggling financially.
Solution: Research funding options during your planning phase
There are many sources of funding available, and it’s important to find the option that best fits your needs and timeframe.
For example, expanding inventory should result in a relatively rapid return on your investment. In this case, quick access to short-term funding through a line of credit may be a good solution. For fixed assets like large equipment or real estate with longer-term returns on investment, you’ll want funding with longer terms and fixed rates to make monthly payments more manageable.
It’s also important to know that some lenders approve loans based only on historical performance, while others are willing to consider projections. This can make a significant difference in how much you can borrow and the terms you receive. Take the time to talk to a variety of lenders to learn more about what they require before you apply.
When you’re ready to grow your business, Pursuit can help
The best way to take advantage of expansion opportunities is to plan ahead. Knowing when your business is ready for expansion, the right reasons for expansion, what it takes, and how you’ll financially support expansion, will greatly increase your chances of success when you decide to expand.
Pursuit is a leading small business lender that helps small businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington to get the funding you need. We offer more than 15 loan options and a line of credit, as well as insightful resources and business advisory services.
Start your application to learn more about the ways we can help!
