Business owners, startups, and entrepreneurs do everything in their power to ensure their business succeeds, and expansion may be the right choice. Maybe you want to take your local business state-wide. Or you want to create a new product to increase your customer base. Whether you’re opening a new business location or adding products and services, financing expansions may be your best option.

Learn what to consider before you finance an expansion, when an expansion is the right move, and what to look for in a new expansion location in this article from Nav.

Financing Considerations Before Expanding to a New Business Location or Major Capital Investment

While it can be a fantastic move to grow a business, expanding too quickly or too early is something any small business wants to avoid, since it can lead to financial trouble. Here are the top financial considerations to make before you decide to expand your business or choose what kind of expansion you want to pursue.

Funding the expansion

The biggest consideration is how you’ll pay for the expansion itself. You may have to take out small business loans, utilize cash reserves, or raise your prices. Some businesses choose to rely on potential revenue they’ll make from the expansion to pay for all or part of it, but this is a risk because those profits aren’t guaranteed. Take a look at all the costs associated with an expansion and make sure you can afford it before deciding whether or not it’s worth it. 

Overhead or production costs 

The costs of opening a new location depend on important factors like the type of business (a retail business will have wildly different costs than an office space, for example) and more hidden costs like renovations and local taxes. If you decide on opening a new business location, you’ll have to think about overhead costs like rent and utilities or real estate costs, office supplies, business insurance, and more. These costs will increase with more physical locations. However, some of your overhead costs, like marketing, human resources, and accounting can be split between the two locations. 

Meanwhile, if you choose to expand your products or services, you’ll need to think about possible manufacturing costs, new facilities, and marketing.

Money on hand

Being able to pay for an expansion as a small business owner is one thing. But you’ll also need to make sure you have enough working capital, credit, and cash reserves left to keep your business running smoothly. Try not to rely on funding the expansion with profits you may make from the new arm of your business — these funds aren’t guaranteed and can be a big risk. Make cash flow projections for after the expansion to ensure you’re on solid financial footing before expanding.

Possible pricing changes

The prices you charge for your products can be affected by an expansion in a number of ways: increase, decrease, or stay the same. You can lower your prices to try to increase your market share, or increase your prices for a while to help fund the expansion. Or you may decide to keep your prices the same to keep profits steady.

Why It Can Pay to Finance an Expanding Business

Even if you can’t afford an expansion outright at the moment, it may be the right time to expand. Rather than missing the opportunity, obtaining financing can allow you to add to your products and services. Although an expansion costs money upfront, these new offerings can increase your revenue to such an extent that it’s worth it in the long run. 

When you’re looking for financing, make sure you get the best interest rate possible, get the best terms you can, and understand the fine print. Building your credit is an essential way to getting the best terms possible. Learn how to establish business credit in this guide from Nav.

Making a Business Expansion Pay for Itself

Pulling off a business expansion means you can increase your profits and customer base in such a way that it basically pays for itself. Assess your sales projections, the costs of your expansion, how it will affect cash flow, and increased operating costs.

There are also government incentives that you may qualify for when you’re expanding your business. For example, the Small Business Administration (SBA) allows small businesses located in underutilized business zones to become HUBZone members. This program offers preferential consideration, increased eligibility for federal contract competitions, and more.

What Investors Want to See From an Expansion Location

If you’re finding a new branch location and want to bring on investors, you’ll need a business plan that shows a positive return on investment. They’ll also need to see that it’s the right location.

When you’re considering expanding to a new potential location, look into details like:

• Zoning: Local zoning ordinances can dictate what types of businesses can exist in the area.
• Demographics: Research the customer base that lives and shops in the area, including average age, sex, and income level.
• Local market: Look at nearby businesses to figure out whether your target market shops in that area or not.
• Foot traffic: Decide whether there are enough people walking or passing by to provide enough potential customers.
• Convenient parking: Having a place for shoppers to park can make it easier for them to visit your business.
• Occupancy: Make sure the building can hold the number of customers you expect.

Will Expansion Generate Cash That Can Be Leveraged? 

Leverage is when a business uses money it borrowed (like from a loan or other financial instruments) to invest in improvements or efficiency increases that boost the business’s value. Taking on debt increases a business’s leverage. So the more debt your business has, the more highly leveraged you are. It’s not necessarily a bad thing to be highly leveraged — especially when times are good and you aren’t having issues paying your bills. However, if revenues start to fall, being highly leveraged might mean you’ll run into late payments and other problems that come with having a lot of debt. 

Leveraging an expansion by taking on debt means you don’t have to give up ownership of your company like you would with an investor. You can find your business’s current leverage using several different financial ratios, like the debt-to-asset ratio and debt-to-equity ratio. 

Keeping Up With Expansion Cash Needs Using New Cash Flow

Aside from choosing the right location or the right product to add, you’ll need to decide how to fund your expansion and pay for the costs that come up along the way. Business credit cards give small business owners flexible capital, while larger loans and lines of credit provide larger amounts of financing. Use Nav to get your business’s best funding options — that are personalized based on your business’s data.